Title 26

SECTION 1.1502-26

1.1502-26 Consolidated dividends received deduction.

§ 1.1502-26 Consolidated dividends received deduction.

(a) In general. (1) The consolidated dividends received deduction for the taxable year shall be the lesser of:

(i) The aggregate of the deduction of the members of the group allowable under sections 243(a)(1), 244(a), and 245 (computed without regard to the limitations provided in section 246(b)), or

(ii) 85 percent of the consolidated taxable income computed without regard to the consolidated net operating loss deduction, consolidated section 247 deduction, the consolidated dividends received deduction, and any consolidated net capital loss carryback to the taxable year.

Subdivision (ii) of this subparagraph shall not apply for any consolidated return year for which there is a consolidated net operating loss. (See §§ 1.1502-21(e) or 1.1502-21A(f), as appropriate for the definition of a consolidated net operating loss.)

(2) If any member computes a deduction under section 593(b)(2) for a taxable year beginning after July 11, 1969, and ending before August 30, 1975, the deduction otherwise computed under this section shall be reduced by an amount determined by multiplying the deduction (determined without regard to this sentence and without regard to dividends received by the common parent if such parent does not use the percentage of income method provided by section 593(b)(2)) by the applicable percentage of the member with the highest applicable percentage (determined under subparagraphs (A) and (B) of section 593(b)(2)).

(3) For taxable years ending on or after August 30, 1975, the deduction otherwise computed under this section shall be reduced by the sum of the amounts determined under paragraph (a)(4) of this section for each member that is a thrift institution that computes a deduction under section 593(b)(2).

(4) For each thrift institution, the amount determined under this subparagraph is the product of:

(i) The portion of the deduction determined with regard to the sum of the dividends received by: (A) The thrift institution, and (B) any member in which that thrift institution owns, directly and with the application of paragraph (a)(5) of this section, 5 percent or more of the stock on any day during the consolidated return year, and

(ii) The thrift institution's applicable percentage determined under subparagraphs (A) and (B) of section 593(b)(2).

For purposes of this subparagraph, dividends allocated to a thrift institution under § 1.596-1(c) shall be considered received by the thrift institution.

(5) For purposes of paragraph (a)(4)(i) of this section, a member owning stock of another member (the “second member”) shall be considered as owning its proportionate share of any stock of a member owned by the second member. Stock considered as being owned by reason of the preceding sentence shall, for purposes of applying that sentence, be treated as actually owned. The proportionate share of stock in a member owned by another member is the proportion which the value of the stock so owned bears to the value of all the outstanding stock in the member. For purposes of this paragraph the term “stock” includes nonvoting stock which is limited and preferred as to dividends.

(6) For purposes of paragraph (a)(4)(i) of this section, if two or more thrift institutions that are both members of the group each owns 5 percent or more of the same member's stock, the member's stock will be considered to be owned only by the thrift institution with the highest applicable percentage.

(b) Intercompany dividends. The deduction determined under paragraph (a) of this section is determined without taking into account intercompany dividends to the extent that, under § 1.1502-13(f)(2), they are not included in gross income. See § 1.1502-13 for additional rules relating to intercompany dividends.

(c) Examples. The provisions of this section may be illustrated by the following examples:

Example 1.Corporations P, S, and S-1 filed a consolidated return for the calendar year 1966 showing consolidated taxable income of $100,000 (determined without regard to the consolidated net operating loss deduction, consolidated dividends received deduction, and the consolidated section 247 deduction). Such corporations received dividends during such year from nonmember domestic corporations as follows:
Dividends
Corporation:
P $6,000
S 10,000
S-1 34,000
Total 50,000
The dividends received deduction allowable to each member under section 243(a)(1) (computed without regard to the limitation in section 246(b)) is as follows: P has $5,100 (85 percent of $6,000), S has $8,500 (85 percent of $10,000), and S-1 has $28,900 (85 percent of $34,000), or a total of $42,500. Since $42,500 is less than $85,000 (85 percent of $100,000), the consolidated dividends received deduction is $42,500. Example 2.Assume the same facts as in example (1) except that consolidated taxable income (computed without regard to the consolidated net operating loss deduction, consolidated dividends received deduction, and the consolidated section 247 deduction) was $40,000. The aggregate of the dividends received deductions, $42,500, computed without regard to section 246(b), results in a consolidated net operating loss of $2,500. See section 172(d)(6). Therefore, paragraph (a)(2) of this section does not apply and the consolidated dividends received deduction is $42,500. [T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7631, 44 FR 40497, July 11, 1979; T.D. 8597, 60 FR 36710, July 18, 1995; T.D. 8677, 61 FR 33323, June 27, 1996; T.D. 8823, 64 FR 36099, July 2, 1999]