
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: 26USC246]

 
                     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. 246. Rules applying to deductions for dividends received


(a) Deduction not allowed for dividends from certain corporations

                           (1) In general

        The deductions allowed by sections 243, 244, and 245 shall not 
    apply to any dividend from a corporation which, for the taxable year 
    of the corporation in which the distribution is made, or for the 
    next preceding taxable year of the corporation, is a corporation 
    exempt from tax under section 501 (relating to certain charitable, 
    etc., organizations) or section 521 (relating to farmers' 
    cooperative associations).

    (2) Subsection not to apply to certain dividends of Federal 
                               Home Loan Banks

        (A) Dividends out of current earnings and profits

            In the case of any dividend paid by any FHLB out of earnings 
        and profits of the FHLB for the taxable year in which such 
        dividend was paid, paragraph (1) shall not apply to that portion 
        of such dividend which bears the same ratio to the total 
        dividend as--
                (i) the dividends received by the FHLB from the FHLMC 
            during such taxable year, bears to
                (ii) the total earnings and profits of the FHLB for such 
            taxable year.

        (B) Dividends out of accumulated earnings and profits

            In the case of any dividend which is paid out of any 
        accumulated earnings and profits of any FHLB, paragraph (1) 
        shall not apply to that portion of the dividend which bears the 
        same ratio to the total dividend as--
                (i) the amount of dividends received by such FHLB from 
            the FHLMC which are out of earnings and profits of the 
            FHLMC--
                    (I) for taxable years ending after December 31, 
                1984, and
                    (II) which were not previously treated as 
                distributed under subparagraph (A) or this subparagraph, 
                bears to

                (ii) the total accumulated earnings and profits of the 
            FHLB as of the time such dividend is paid.

        For purposes of clause (ii), the accumulated earnings and 
        profits of the FHLB as of January 1, 1985, shall be treated as 
        equal to its retained earnings as of such date.

        (C) Coordination with section 243

            To the extent that paragraph (1) does not apply to any 
        dividend by reason of subparagraph (A) or (B) of this paragraph, 
        the requirement contained in section 243(a) that the corporation 
        paying the dividend be subject to taxation under this chapter 
        shall not apply.

        (D) Definitions

            For purposes of this paragraph--
            (i) FHLB

                The term ``FHLB'' means any Federal Home Loan Bank.
            (ii) FHLMC

                The term ``FHLMC'' means the Federal Home Loan Mortgage 
            Corporation.
            (iii) Taxable year of FHLB

                The taxable year of an FHLB shall, except as provided in 
            regulations prescribed by the Secretary, be treated as the 
            calendar year.
            (iv) Earnings and profits

                The earnings and profits of any FHLB for any taxable 
            year shall be treated as equal to the sum of--
                    (I) any dividends received by the FHLB from the 
                FHLMC during such taxable year, and
                    (II) the total earnings and profits (determined 
                without regard to dividends described in subclause (I)) 
                of the FHLB as reported in its annual financial 
                statement prepared in accordance with section 20 of the 
                Federal Home Loan Bank Act (12 U.S.C. 1440).

(b) Limitation on aggregate amount of deductions

                          (1) General rule

        Except as provided in paragraph (2), the aggregate amount of the 
    deductions allowed by sections 243(a)(1), 244(a), and subsection (a) 
    or (b) of section 245 shall not exceed the percentage determined 
    under paragraph (3) of the taxable income computed without regard to 
    the deductions allowed by sections 172, 243(a)(1), 244(a), 
    subsection (a) or (b) of section 245, and 247, without regard to any 
    adjustment under section 1059, and without regard to any capital 
    loss carryback to the taxable year under section 1212(a)(1).

                  (2) Effect of net operating loss

        Paragraph (1) shall not apply for any taxable year for which 
    there is a net operating loss (as determined under section 172).

                          (3) Special rules

        The provisions of paragraph (1) shall be applied--
            (A) first separately with respect to dividends from 20-
        percent owned corporations (as defined in section 243(c)(2)) and 
        the percentage determined under this paragraph shall be 80 
        percent, and
            (B) then separately with respect to dividends not from 20-
        percent owned corporations and the percentage determined under 
        this paragraph shall be 70 percent and the taxable income shall 
        be reduced by the aggregate amount of dividends from 20-percent 
        owned corporations (as so defined).

(c) Exclusion of certain dividends

                           (1) In general

        No deduction shall be allowed under section 243, 244, or 245, in 
    respect of any dividend on any share of stock--
            (A) which is held by the taxpayer for 45 days or less during 
        the 90-day period beginning on the date which is 45 days before 
        the date on which such share becomes ex-dividend with respect to 
        such dividend, or
            (B) to the extent that the taxpayer is under an obligation 
        (whether pursuant to a short sale or otherwise) to make related 
        payments with respect to positions in substantially similar or 
        related property.

     (2) 90-day rule in the case of certain preference dividends

        In the case of stock having preference in dividends, if the 
    taxpayer receives dividends with respect to such stock which are 
    attributable to a period or periods aggregating in excess of 366 
    days, paragraph (1)(A) shall be applied--
            (A) by substituting ``90 days'' for ``45 days'' each place 
        it appears, and
            (B) by substituting ``180-day period'' for ``90-day 
        period''.

                (3) Determination of holding periods

        For purposes of this subsection, in determining the period for 
    which the taxpayer has held any share of stock--
            (A) the day of disposition, but not the day of acquisition, 
        shall be taken into account, and
            (B) paragraph (4) of section 1223 shall not apply.

     (4) Holding period reduced for periods where risk of loss 
                                 diminished

        The holding periods determined for purposes of this subsection 
    shall be appropriately reduced (in the manner provided in 
    regulations prescribed by the Secretary) for any period (during such 
    periods) in which--
            (A) the taxpayer has an option to sell, is under a 
        contractual obligation to sell, or has made (and not closed) a 
        short sale of, substantially identical stock or securities,
            (B) the taxpayer is the grantor of an option to buy 
        substantially identical stock or securities, or
            (C) under regulations prescribed by the Secretary, a 
        taxpayer has diminished his risk of loss by holding 1 or more 
        other positions with respect to substantially similar or related 
        property.

    The preceding sentence shall not apply in the case of any qualified 
    covered call (as defined in section 1092(c)(4) but without regard to 
    the requirement that gain or loss with respect to the option not be 
    ordinary income or loss).

(d) Dividends from a DISC or former DISC

    No deduction shall be allowed under section 243 in respect of a 
dividend from a corporation which is a DISC or former DISC (as defined 
in section 992(a)) to the extent such dividend is paid out of the 
corporation's accumulated DISC income or previously taxed income, or is 
a deemed distribution pursuant to section 995(b)(1).

(e) Certain distributions to satisfy requirements

    No deduction shall be allowed under section 243(a) with respect to a 
dividend received pursuant to a distribution described in section 
936(h)(4).

(Aug. 16, 1954, ch. 736, 68A Stat. 74; Pub. L. 85-866, title I, 
Secs. 18(a), 57(c)(2), Sept. 2, 1958, 72 Stat. 1614, 1646; Pub. L. 88-
272, title II, Sec. 214(b)(2), Feb. 26, 1964, 78 Stat. 55; Pub. L. 91-
172, title IV, Sec. 434(b)(1), title V, Sec. 512(f)(3), Dec. 30, 1969, 
83 Stat. 625, 641; Pub. L. 92-178, title V, Sec. 502(a), Dec. 10, 1971, 
85 Stat. 549; Pub. L. 94-455, title X, Sec. 1051(f)(3), title XIX, 
Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1646, 1834; Pub. L. 97-248, 
title II, Sec. 213(c), Sept. 3, 1982, 96 Stat. 465; Pub. L. 98-369, div. 
A, title I, Secs. 53(b), (d)(2), 177(b), title VIII, Sec. 801(b)(2)(A), 
July 18, 1984, 98 Stat. 567, 568, 709, 995; Pub. L. 99-514, title VI, 
Sec. 611(a)(3), title XII, Sec. 1275(a)(2)(B), title XVIII, 
Secs. 1804(b)(1)(A), (B), 1812(d)(1), Oct. 22, 1986, 100 Stat. 2249, 
2598, 2798, 2835; Pub. L. 100-203, title X, Sec. 10221(c)(1), Dec. 22, 
1987, 101 Stat. 1330-409; Pub. L. 100-647, title I, Sec. 1018(u)(10), 
Nov. 10, 1988, 102 Stat. 3590; Pub. L. 104-188, title I, 
Sec. 1616(b)(4), Aug. 20, 1996, 110 Stat. 1856; Pub. L. 105-34, title X, 
Sec. 1015(a), (b), Aug. 5, 1997, 111 Stat. 921, 922.)


                               Amendments

    1997--Subsec. (c)(1)(A). Pub. L. 105-34, Sec. 1015(a), amended 
subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: 
``which is held by the taxpayer for 45 days or less, or''.
    Subsec. (c)(2). Pub. L. 105-34, Sec. 1015(b)(1), amended heading and 
text of par. (2) generally. Prior to amendment, text read as follows: 
``In the case of any stock having preference in dividends, the holding 
period specified in paragraph (1)(A) shall be 90 days in lieu of 45 days 
if the taxpayer receives dividends with respect to such stock which are 
attributable to a period or periods aggregating in excess of 366 days.''
    Subsec. (c)(3). Pub. L. 105-34, Sec. 1015(b)(2), inserted ``and'' at 
end of subpar. (A), redesignated subpar. (C) as (B), and struck out 
former subpar. (B) which read as follows: ``there shall not be taken 
into account any day which is more than 45 days (or 90 days in the case 
of stock to which paragraph (2) applies) after the date on which such 
share becomes ex-dividend, and''.
    1996--Subsec. (f). Pub. L. 104-188 struck out subsec. (f) which 
provided a cross reference to section 596 of this title for special rule 
relating to mutual savings banks, etc., to which section 593 applies.
    1988--Subsec. (c)(1)(A). Pub. L. 100-647 substituted ``which'' for 
``Which''.
    1987--Subsec. (b)(1). Pub. L. 100-203, Sec. 10221(c)(1)(A), 
substituted ``the percentage determined under paragraph (3)'' for ``80 
percent''.
    Subsec. (b)(3). Pub. L. 100-203, Sec. 10221(c)(1)(B), added par. 
(3).
    1986--Subsec. (a)(2)(B). Pub. L. 99-514, Sec. 1812(d)(1)(A), 
substituted ``In'' for ``For purposes of subparagraph (A), in'' in 
introductory provisions and substituted cl. (i)(II) for former cl. 
(i)(II) which read as follows: ``which were not taken into account under 
subparagraph (A), bears to''.
    Subsec. (a)(2)(C), (D). Pub. L. 99-514, Sec. 1812(d)(1)(B), (C), 
added subpar. (C), redesignated former subpar. (C) as (D), and added cl. 
(iv) to subpar. (D).
    Subsec. (b)(1). Pub. L. 99-514, Sec. 611(a)(3), substituted ``80 
percent'' for ``85 percent''.
    Subsec. (c)(1)(A). Pub. L. 99-514, Sec. 1804(b)(1)(A), amended 
subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: 
``which is sold or otherwise disposed of in any case in which the 
taxpayer has held such share for 45 days or less, or''.
    Subsec. (c)(4). Pub. L. 99-514, Sec. 1804(b)(1)(B), substituted 
``determined for purposes of this subsection'' for ``determined under 
paragraph (3)''.
    Subsec. (e). Pub. L. 99-514, Sec. 1275(a)(2)(B), struck out ``or 
934(e)(3)'' after ``936(h)(4)''.
    1984--Subsec. (a). Pub. L. 98-369, Sec. 177(b), amended subsec. (a) 
generally, designating existing provisions as par. (1) and adding par. 
(2).
    Subsec. (b)(1). Pub. L. 98-369, Sec. 801(b)(2)(A), substituted 
``subsection (a) or (b) of section 245'' for ``245'' in two places.
    Pub. L. 98-369, Sec. 53(d)(2), substituted ``without regard to any 
adjustment under section 1059, and without regard'' for ``and without 
regard''.
    Subsec. (c)(1)(A). Pub. L. 98-369, Sec. 53(b)(1), substituted ``45'' 
for ``15''.
    Subsec. (c)(1)(B). Pub. L. 98-369, Sec. 53(b)(3), substituted ``to 
make related payments with respect to positions in substantially similar 
or related property'' for ``to make corresponding payments with respect 
to substantially identical stock or securities''.
    Subsec. (c)(2). Pub. L. 98-369, Sec. 53(b)(1), substituted ``45'' 
for ``15''.
    Subsec. (c)(3). Pub. L. 98-369, Sec. 53(b)(4), struck out last 
sentence which directed that the holding periods determined under the 
preceding provisions of this paragraph be appropriately reduced (in the 
manner provided in regulations prescribed by the Secretary) for any 
period (during such holding periods) in which the taxpayer had an option 
to sell, was under a contractual obligation to sell, or had made (and 
not closed) a short sale of, substantially identical stock or 
securities.
    Subsec. (c)(3)(B). Pub. L. 98-369, Sec. 53(b)(1), substituted ``45'' 
for ``15''.
    Subsec. (c)(4). Pub. L. 98-369, Sec. 53(b)(2), added par. (4).
    1982--Subsecs. (e), (f). Pub. L. 97-248 added subsec. (e) and 
redesignated former subsec. (e) as (f).
    1976--Subsec. (a). Pub. L. 94-455, Sec. 1051(f)(3), struck out 
references to dividends from corporations organized under the China 
Trade Act, 1922, and corporations to which section 931 (relating to 
income from sources within possessions of the United States) applies.
    Subsec. (c)(3). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out ``or 
his delegate'' after ``Secretary''.
    1971--Subsecs. (d), (e). Pub. L. 92-178 added subsec. (d) and 
redesignated former subsec. (d) as (e).
    1969--Subsec. (b)(1). Pub. L. 91-172, Sec. 512(f)(3), substituted 
``and 247, and without regard to any capital loss carryback to the 
taxable year under section 1212(a)(1)'' for ``and 247''.
    Subsec. (d). Pub. L. 91-172, Sec. 434(b)(1), added subsec. (d).
    1964--Subsec. (b). Pub. L. 88-272 substituted ``243(a)(1), 244(a)'' 
for ``243(a), 244'' wherever appearing.
    1958--Subsec. (b)(1). Pub. L. 85-866, Sec. 57(c)(2), substituted 
``243(a)'' for ``243'' wherever appearing.
    Subsec. (c). Pub. L. 85-866, Sec. 18(a), added subsec. (c).


                    Effective Date of 1997 Amendment

    Section 1015(c) of Pub. L. 105-34 provided that:
    ``(1) In general.--The amendments made by this section [amending 
this section] shall apply to dividends received or accrued after the 
30th day after the date of the enactment of this Act [Aug. 5, 1997].
    ``(2) Transitional rule.--The amendments made by this section shall 
not apply to dividends received or accrued during the 2-year period 
beginning on the date of the enactment of this Act if--
        ``(A) the dividend is paid with respect to stock held by the 
    taxpayer on June 8, 1997, and all times thereafter until the 
    dividend is received,
        ``(B) such stock is continuously subject to a position described 
    in section 246(c)(4) of the Internal Revenue Code of 1986 on June 8, 
    1997, and all times thereafter until the dividend is received, and
        ``(C) such stock and position are clearly identified in the 
    taxpayer's records within 30 days after the date of the enactment of 
    this Act.
Stock shall not be treated as meeting the requirement of subparagraph 
(B) if the position is sold, closed, or otherwise terminated and 
reestablished.''


                    Effective Date of 1996 Amendment

    Amendment by Pub. L. 104-188 applicable to taxable years beginning 
after Dec. 31, 1995, see section 1616(c) of Pub. L. 104-188, set out as 
a note under section 593 of this title.


                    Effective Date of 1988 Amendment

    Amendment by 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 taxable years beginning 
after Dec. 31, 1987, see section 10221(e)(2) of Pub. L. 100-203, as 
amended, set out as a note under section 243 of this title.


                    Effective Date of 1986 Amendment

    Section 611(b) of Pub. L. 99-514 provided that:
    ``(1) In general.--The amendments made by subsection (a) [amending 
this section and sections 243, 244, 246A, and 805 of this title] shall 
apply to dividends received or accrued after December 31, 1986, in 
taxable years ending after such date.
    ``(2) Amendment relating to limitation on deductions.--The amendment 
made by subsection (a) to section 246(b) of the Internal Revenue Code of 
1986 shall apply to taxable years beginning after December 31, 1986.''
    Amendment by section 1275(a)(2)(B) of Pub. L. 99-514 applicable to 
taxable years beginning after Dec. 31, 1986, with certain exceptions and 
qualifications, see section 1277 of Pub. L. 99-514, set out as a note 
under section 931 of this title.
    Section 1804(b)(1)(C) of Pub. L. 99-514 provided that: ``The 
amendments made by this paragraph [amending this section] shall apply to 
stock acquired after March 1, 1986.''
    Amendment by section 1812(d)(1) 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

    Amendment by section 53(d)(2) of Pub. L. 98-369 applicable to 
distributions after Mar. 1, 1984, in taxable years ending after such 
date, and amendment of subsec. (c) of this section by section 53(b) of 
Pub. L. 98-369, applicable to stock acquired after July 18, 1984, in 
taxable years ending after such date, see section 53(e)(1), (2) of Pub. 
L. 98-369, set out as an Effective Date note under section 1059 of this 
title.
    Amendment by section 177(b) of Pub. L. 98-369, effective Jan. 1, 
1985, see section 177(d) of Pub. L. 98-369, set out as a note under 
section 172 of this title.
    Amendment by section 801(b)(2)(A) of Pub. L. 98-369 applicable to 
transactions after Dec. 31, 1984, in taxable years ending after such 
date, see section 805(a)(1) of Pub. L. 98-369, as amended, set out as a 
note under section 245 of this title.


                    Effective Date of 1982 Amendment

    Amendment by Pub. L. 97-248 applicable to taxable years beginning 
after Dec. 31, 1982, see section 213(e)(1) of Pub. L. 97-248, set out as 
a note under section 936 of this title.


                    Effective Date of 1976 Amendment

    For effective date of amendment by section 1051(f)(3) of Pub. L. 94-
455, see section 1051(i) of Pub. L. 94-455, set out as a note under 
section 27 of this title.
    Amendment by section 1906(b)(13)(A) of Pub. L. 94-455 effective Feb. 
1, 1977, see section 1906(d)(1) of Pub. L. 94-455, set out as a note 
under section 6013 of this title.


                    Effective Date of 1971 Amendment

    Amendment by Pub. L. 92-178 applicable with respect to taxable years 
ending after Dec. 31, 1971, except that a corporation may not be a DISC 
for any taxable year beginning before Jan. 1, 1972, see section 507 of 
Pub. L. 92-178, set out as an Effective Date note under section 991 of 
this title.


                    Effective Date of 1969 Amendment

    Amendment by section 512(f)(3) of Pub. L. 91-172 applicable with 
respect to net capital losses sustained in taxable years beginning after 
Dec. 31, 1969, see section 512(g) of Pub. L. 91-172, set out as a note 
under section 1212 of this title.
    Section 434(c) of Pub. L. 91-172 provided that: ``The amendments 
made by this section [enacting section 596 of this title and amending 
this section] shall apply to taxable years beginning after July 11, 
1969.''


                    Effective Date of 1964 Amendment

    Amendment by Pub. L. 88-272 applicable to dividends received in 
taxable years ending after Dec. 31, 1963, see section 214(c) of Pub. L. 
88-272, set out as a note under section 243 of this title.


                    Effective Date of 1958 Amendment

    Section 18(b) of Pub. L. 85-866 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply with respect to 
taxable years ending after December 31, 1957, but only with respect to 
shares of stock acquired or short sales made after December 31, 1957.''
    Amendment by section 57(c)(2) of Pub. L. 85-866 applicable with 
respect to taxable years beginning after Sept. 2, 1958, see section 
57(d) of Pub. L. 85-866, set out as a note under section 243 of this 
title.


           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 163, 172, 805, 810, 834, 
852, 854, 857, 901, 1059, 1092, 1259 of this title.
