
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC245]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
             PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS
 
Sec. 245. Dividends received from certain foreign corporations


(a) Dividends from 10-percent owned foreign corporations

                           (1) In general

        In the case of dividends received by a corporation from a 
    qualified 10-percent owned foreign corporation, there shall be 
    allowed as a deduction an amount equal to the percent (specified in 
    section 243 for the taxable year) of the U.S.-source portion of such 
    dividends.

         (2) Qualified 10-percent owned foreign corporation

        For purposes of this subsection, the term ``qualified 10-percent 
    owned foreign corporation'' means any foreign corporation (other 
    than a foreign personal holding company or passive foreign 
    investment company) if at least 10 percent of the stock of such 
    corporation (by vote and value) is owned by the taxpayer.

                       (3) U.S.-source portion

        For purposes of this subsection, the U.S.-source portion of any 
    dividend is an amount which bears the same ratio to such dividend 
    as--
            (A) the post-1986 undistributed U.S. earnings, bears to
            (B) the total post-1986 undistributed earnings.

                (4) Post-1986 undistributed earnings

        For purposes of this subsection, the term ``post-1986 
    undistributed earnings'' has the meaning given to such term by 
    section 902(c)(1).

              (5) Post-1986 undistributed U.S. earnings

        For purposes of this subsection, the term ``post-1986 
    undistributed U.S. earnings'' means the portion of the post-1986 
    undistributed earnings which is attributable to--
            (A) income of the qualified 10-percent owned foreign 
        corporation which is effectively connected with the conduct of a 
        trade or business within the United States and subject to tax 
        under this chapter, or
            (B) any dividend received (directly or through a wholly 
        owned foreign corporation) from a domestic corporation at least 
        80 percent of the stock of which (by vote and value) is owned 
        (directly or through such wholly owned foreign corporation) by 
        the qualified 10-percent owned foreign corporation.

                          (6) Special rule

        If the 1st day on which the requirements of paragraph (2) are 
    met with respect to any foreign corporation is in a taxable year of 
    such corporation beginning after December 31, 1986, the post-1986 
    undistributed earnings and the post-1986 undistributed U.S. earnings 
    of such corporation shall be determined by only taking into account 
    periods beginning on and after the 1st day of the 1st taxable year 
    in which such requirements are met.

                (7) Coordination with subsection (b)

        Earnings and profits of any qualified 10-percent owned foreign 
    corporation for any taxable year shall not be taken into account 
    under this subsection if the deduction provided by subsection (b) 
    would be allowable with respect to dividends paid out of such 
    earnings and profits.

               (8) Disallowance of foreign tax credit

        No credit shall be allowed under section 901 for any taxes paid 
    or accrued (or treated as paid or accrued) with respect to the 
    United States-source portion of any dividend received by a 
    corporation from a qualified 10-percent-owned foreign corporation.

                  (9) Coordination with section 904

        For purposes of section 904, the U.S.-source portion of any 
    dividend received by a corporation from a qualified 10-percent owned 
    foreign corporation shall be treated as from sources in the United 
    States.

                   (10) Coordination with treaties

        If--
            (A) any portion of a dividend received by a corporation from 
        a qualified 10-percent-owned foreign corporation would be 
        treated as from sources in the United States under paragraph 
        (9),
            (B) under a treaty obligation of the United States (applied 
        without regard to this subsection), such portion would be 
        treated as arising from sources outside the United States, and
            (C) the taxpayer chooses the benefits of this paragraph,

    this subsection shall not apply to such dividend (but subsections 
    (a), (b), and (c) of section 904 and sections 902, 907, and 960 
    shall be applied separately with respect to such portion of such 
    dividend).

                 (11) Coordination with section 1248

        For purposes of this subsection, the term ``dividend'' does not 
    include any amount treated as a dividend under section 1248.

(b) Certain dividends received from wholly owned foreign subsidiaries

                           (1) In general

        In the case of dividends described in paragraph (2) received 
    from a foreign corporation by a domestic corporation which, for its 
    taxable year in which such dividends are received, owns (directly or 
    indirectly) all of the outstanding stock of such foreign 
    corporation, there shall be allowed as a deduction (in lieu of the 
    deduction provided by subsection (a)) an amount equal to 100 percent 
    of such dividends.

                       (2) Eligible dividends

        Paragraph (1) shall apply only to dividends which are paid out 
    of the earnings and profits of a foreign corporation for a taxable 
    year during which--
            (A) all of its outstanding stock is owned (directly or 
        indirectly) by the domestic corporation to which such dividends 
        are paid; and
            (B) all of its gross income from all sources is effectively 
        connected with the conduct of a trade or business within the 
        United States.

                            (3) Exception

        Paragraph (1) shall not apply to any dividends if an election 
    under section 1562 is effective for either--
            (A) the taxable year of the domestic corporation in which 
        such dividends are received, or
            (B) the taxable year of the foreign corporation out of the 
        earnings and profits of which such dividends are paid.

(c) Certain dividends received from FSC

                           (1) In general

        In the case of a domestic corporation, there shall be allowed as 
    a deduction an amount equal to--
            (A) 100 percent of any dividend received from another 
        corporation which is distributed out of earnings and profits 
        attributable to foreign trade income for a period during which 
        such other corporation was a FSC, and
            (B) 70 percent (80 percent in the case of dividends from a 
        20-percent owned corporation as defined in section 243(c)(2)) of 
        any dividend received from another corporation which is 
        distributed out of earnings and profits attributable to 
        effectively connected income received or accrued by such other 
        corporation while such other corporation was a FSC.

                 (2) Exception for certain dividends

        Paragraph (1) shall not apply to any dividend which is 
    distributed out of earnings and profits attributable to foreign 
    trade income which--
            (A) is section 923(a)(2) \1\ nonexempt income (within the 
        meaning of section 927(d)(6)),\1\ or
---------------------------------------------------------------------------
    \1\ See References in Text note below.
---------------------------------------------------------------------------
            (B) would not, but for section 923(a)(4),\1\ be treated as 
        exempt foreign trade income.

            (3) No deduction under subsection (a) or (b)

        No deduction shall be allowable under subsection (a) or (b) with 
    respect to any dividend which is distributed out of earnings and 
    profits of a corporation accumulated while such corporation was a 
    FSC.

                           (4) Definitions

        For purposes of this subsection--

        (A) Foreign trade income; exempt foreign trade income

            The terms ``foreign trade income'' and ``exempt foreign 
        trade income'' have the respective meanings given such terms by 
        section 923.\1\

        (B) Effectively connected income

            The term ``effectively connected income'' means any income 
        which is effectively connected (or treated as effectively 
        connected) with the conduct of a trade or business in the United 
        States and is subject to tax under this chapter. Such term shall 
        not include any foreign trade income.

(Aug. 16, 1954, ch. 736, 68A Stat. 73; Pub. L. 87-834, Sec. 5(c), Oct. 
16, 1962, 76 Stat. 977; Pub. L. 89-809, title I, Sec. 104(d), (e), Nov. 
13, 1966, 80 Stat. 1558; Pub. L. 98-369, div. A, title VIII, 
Sec. 801(b)(1), (2)(B), July 18, 1984, 98 Stat. 994, 995; Pub. L. 99-
514, title XII, Sec. 1226(a), title XVIII, Sec. 1876(d)(1), (j), Oct. 
22, 1986, 100 Stat. 2559, 2898, 2900; Pub. L. 100-203, title X, 
Sec. 10221(d)(1), Dec. 22, 1987, 101 Stat. 1330-409; Pub. L. 100-647, 
title I, Secs. 1006(e)(16), 1012(l)(2), (3), (bb)(9)(A), Nov. 10, 1988, 
102 Stat. 3403, 3513, 3537; Pub. L. 101-239, title VII, 
Sec. 7811(i)(14), Dec. 19, 1989, 103 Stat. 2411.)

                       References in Text

    Section 1562, referred to in subsec. (b)(3), was repealed by Pub. L. 
91-172, title IV, Sec. 401(a)(2), Dec. 30, 1969, 83 Stat. 600.
    Sections 923 and 927, referred to in subsec. (c)(2), (4)(A), were 
repealed by Pub. L. 106-519, Sec. 2, Nov. 15, 2000, 114 Stat. 2423.


                               Amendments

    1989--Subsec. (a)(8). Pub. L. 101-239 made clarifying amendment to 
directory language of Pub. L. 100-647, Sec. 1012(l)(2)(A), see 1988 
Amendment note below.
    1988--Subsec. (a)(8). Pub. L. 100-647, Sec. 1012(l)(2)(A), as 
amended by Pub. L. 101-239, substituted ``Disallowance of foreign tax 
credit'' for ``Coordination with section 902'' in heading and amended 
text generally. Prior to amendment, text read as follows: ``In the case 
of a dividend received by a corporation from a qualified 10-percent 
owned foreign corporation, no credit shall be allowed under section 901 
for any taxes treated as paid under section 902 with respect to the 
U.S.-source portion of such dividend.''
    Subsec. (a)(10), (11). Pub. L. 100-647, Sec. 1012(l)(2)(B), (3), 
added pars. (10) and (11).
    Subsec. (c). Pub. L. 100-647, Sec. 1012(bb)(9)(A), amended subsec. 
(c) generally, revising and restating provisions of pars. (1) to (4).
    Subsec. (d). Pub. L. 100-647, Sec. 1006(e)(16), struck out subsec. 
(d) which read as follows: ``Property distributions.--For purposes of 
this section, the amount of any distribution of property other than 
money shall be the amount determined by applying section 301(b)(1)(B).''
    1987--Subsec. (c)(1)(B). Pub. L. 100-203 substituted ``70 percent 
(80 percent in the case of dividends from a 20-percent owned corporation 
as defined in section 243(c)(2))'' for ``85 percent''.
    1986--Subsec. (a). Pub. L. 99-514, Sec. 1226(a), in amending subsec. 
(a) generally, substituted ``Dividends from 10-percent owned foreign 
corporations'' for ``General rule'' as heading, and in text substituted 
provisions set out in nine numbered paragraphs allowing for deduction 
for dividends received from certain foreign corporations qualifying as 
``10-percent owned foreign corporations'' for former provisions which 
directed that, in the case of dividends received from a foreign 
corporation (other than a foreign personal holding company) which was 
subject to taxation under this chapter, if, for an uninterrupted period 
of not less than 36 months ending with the close of such foreign 
corporation's taxable year in which such dividends were paid (or, if the 
corporation had not been in existence for 36 months at the close of such 
taxable year, for the period the foreign corporation had been in 
existence as of the close of such taxable year) such foreign corporation 
had been engaged in trade or business within the United States and if 50 
percent or more of the gross income of such corporation from all sources 
for such period was effectively connected with the conduct of a trade or 
business within the United States, there was allowed as a deduction in 
the case of a corporation a percentage of dividends received.
    Subsec. (c)(1). Pub. L. 99-514, Sec. 1876(d)(1)(A), amended par. (1) 
generally. Prior to amendment, par. (1) read as follows: ``In the case 
of a domestic corporation, there shall be allowed as a deduction an 
amount equal to 100 percent of any dividend received by such corporation 
from another corporation which is distributed out of earnings and 
profits attributable to foreign trade income for a period during which 
such other corporation was a FSC. The deduction allowable under the 
preceding sentence with respect to any dividend shall be in lieu of any 
deduction allowable under subsection (a) or (b) with respect to such 
dividend.''
    Subsec. (c)(3). Pub. L. 99-514, Sec. 1876(j), added par. (3). Former 
par. (3) redesignated (4).
    Pub. L. 99-514, Sec. 1876(d)(1)(B), inserted ``For purposes of this 
subsection, the term `qualified interest and carrying charges' means any 
interest or carrying charges (as defined in section 927(d)(1)) derived 
from a transaction which results in foreign trade income.''
    Subsec. (c)(4). Pub. L. 99-514, Sec. 1876(j), redesignated former 
par. (3) as (4).
    1984--Subsec. (c). Pub. L. 98-369 added subsec. (c), redesignated 
former subsec. (c) as (d), and substituted therein ``this section'' for 
``subsections (a) and (b)''.
    1966--Subsec. (a). Pub. L. 89-809, Sec. 104(d), (e)(2), substituted 
``and if 50 percent or more of the gross income of such corporation from 
all sources for such period is effectively connected with the conduct of 
a trade or business within the United States'' for ``and has derived 50 
percent or more of its gross income from sources within the United 
States'' in provisions preceding par. (1), ``which is effectively 
connected with the conduct of a trade or business within the United 
States'' for ``from sources within the United States'' in par. (1), ``, 
which is effectively connected with the conduct of a trade or business 
within the United States,'' for ``from sources within the United 
States'' in par. (2), and inserted provisions following par. (2).
    Subsecs. (b), (c). Pub. L. 89-809, Sec. 104(e)(1), (3), added 
subsec. (b), redesignated former subsec. (b) as (c), and substituted 
therein ``subsections (a) and (b)'' for ``subsection (a)''.
    1962--Subsec. (b). Pub. L. 87-834 designated existing provisions as 
subsec. (a), inserted heading, and added subsec. (b).


                    Effective Date of 1989 Amendment

    Amendment by Pub. L. 101-239 effective, except as otherwise 
provided, as if included in the provision of the Technical and 
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such 
amendment relates, see section 7817 of Pub. L. 101-239, set out as a 
note under section 1 of this title.


                    Effective Date of 1988 Amendment

    Section 1012(bb)(9)(B) of Pub. L. 100-647 provided that: ``The 
amendment made by subparagraph (A) [amending this section] shall apply 
as if included in the provision of the Tax Reform Act of 1984 [Pub. L. 
98-369, div. A] to which it relates.''
    Amendment by sections 1006(e)(16) and 1012(l)(2), (3) of Pub. L. 
100-647 effective, except as otherwise provided, as if included in the 
provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which such 
amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a 
note under section 1 of this title.


                    Effective Date of 1987 Amendment

    Amendment by Pub. L. 100-203 applicable to dividends received or 
accrued after Dec. 31, 1987, in taxable years ending after such date, 
see section 10221(e)(1) of Pub. L. 100-203, set out as a note under 
section 243 of this title.


                    Effective Date of 1986 Amendment

    Section 1226(c)(1) of Pub. L. 99-514 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to 
distributions out of earnings and profits for taxable years beginning 
after December 31, 1986.''
    Amendment by section 1876(d)(1), (j) of Pub. L. 99-514 effective, 
except as otherwise provided, as if included in the provisions of the 
Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment 
relates, see section 1881 of Pub. L. 99-514, set out as a note under 
section 48 of this title.


                    Effective Date of 1984 Amendment

    Section 805(a) of title VIII of div. A of Pub. L. 98-369, as amended 
by Pub. L. 99-514, Sec. 2, title XVIII, Sec. 1876(i), (o), (p)(4), Oct. 
22, 1986, 100 Stat. 2095, 2900-2902, provided that:
    ``(1) In general.--Except as provided in this subsection, the 
amendments made by this title [enacting sections 921 to 927 of this 
title, amending this section and sections 246, 274, 275, 441, 901, 904, 
906, 934, 936, 951, 956, 992, 993, 995, 996, 999, 1248, 6011, 6072, 
6501, 6686, and 7651 of this title, and enacting provisions set out as 
notes under sections 921 and 991 of this title] shall apply to 
transactions after December 31, 1984, in taxable years ending after such 
date.
    ``(2) Special rule for certain contracts.--To the extent provided in 
regulations prescribed by the Secretary of the Treasury or his delegate, 
any event or activity required to occur or required to be performed, 
before January 1, 1985, by section 924(c) or (d) or 925(c) of the 
Internal Revenue Code of 1986 [formerly I.R.C. 1954] shall be treated as 
meeting the requirements of such section if such event or activity is 
with respect to--
        ``(A) any lease of more than 3 years duration which was entered 
    into before January 1, 1985,
        ``(B) any contract with respect to which the taxpayer uses the 
    completed contract method of accounting which was entered into 
    before January 1, 1985, or
        ``(C) in the case of any contract other than a lease or contract 
    described in subparagraph (A) or (B), any contract which was entered 
    into before January 1, 1985; except that this subparagraph shall 
    only apply to the first 3 taxable years of the FSC ending after 
    January 1, 1985, or such later taxable years as the Secretary of the 
    Treasury or his delegate may prescribe.
    ``(3) Section 801(d)(10).--The amendment made by section 801(d)(10) 
[amending section 996 of this title] shall apply to distributions on or 
after June 22, 1984.
    ``(4) Section 803.--The amendments made by section 803 [amending 
section 441 of this title] shall apply to taxable years beginning after 
December 31, 1984.''


                    Effective Date of 1966 Amendment

    Amendment by Pub. L. 89-809 applicable with respect to taxable years 
beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set 
out as a note under section 11 of this title.


                    Effective Date of 1962 Amendment

    Amendment by Pub. L. 87-834 applicable to distributions made after 
Dec. 31, 1962, see section 5(d) of Pub. L. 87-834, set out as a note 
under section 301 of this title.


                Dividends Received or Accrued During 1987

    Section 1006(b)(1) of Pub. L. 100-647 provided that: ``In the case 
of dividends received or accrued during 1987--
        ``(A) subparagraph (B) of section 245(c)(1) of the 1986 Code 
    shall be applied by substituting `80 percent' for the percentage 
    specified therein, and
        ``(B) subparagraph (B) of section 861(a)(2) of the 1986 Code 
    shall be applied by substituting `\100/80\ths' for the fraction 
    specified therein.''


           Plan Amendments Not Required Until January 1, 1989

    For provisions directing that if any amendments made by subtitle A 
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan, 
such plan amendment shall not be required to be made before the first 
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. 
L. 99-514, as amended, set out as a note under section 401 of this 
title.

                  Section Referred to in Other Sections

    This section is referred to in sections 56, 78, 163, 172, 243, 246, 
246A, 263, 277, 301, 469, 512, 805, 810, 812, 815, 832, 833, 861, 864, 
1059, 1244 of this title.
