
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC246A]

 
                     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. 246A. Dividends received deduction reduced where portfolio 
        stock is debt financed
        

(a) General rule

    In the case of any dividend on debt-financed portfolio stock, there 
shall be substituted for the percentage which (but for this subsection) 
would be used in determining the amount of the deduction allowable under 
section 243, 244, or 245(a) a percentage equal to the product of--
        (1) 70 percent (80 percent in the case of any dividend from a 
    20-percent owned corporation as defined in section 243(c)(2)), and
        (2) 100 percent minus the average indebtedness percentage.

(b) Section not to apply to dividends for which 100 percent dividends 
        received deduction allowable

    Subsection (a) shall not apply to--
        (1) qualifying dividends (as defined in section 243(b) without 
    regard to section 243(c)(4)),\1\ and
---------------------------------------------------------------------------
    \1\ See References in Text note below.
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        (2) dividends received by a small business investment company 
    operating under the Small Business Investment Act of 1958.

(c) Debt financed portfolio stock

    For purposes of this section--

                           (1) In general

        The term ``debt financed portfolio stock'' means any portfolio 
    stock if at some time during the base period there is portfolio 
    indebtedness with respect to such stock.

                         (2) Portfolio stock

        The term ``portfolio stock'' means any stock of a corporation 
    unless--
            (A) as of the beginning of the ex-dividend date, the 
        taxpayer owns stock of such corporation--
                (i) possessing at least 50 percent of the total voting 
            power of the stock of such corporation, and
                (ii) having a value equal to at least 50 percent of the 
            total value of the stock of such corporation, or

            (B) as of the beginning of the ex-dividend date--
                (i) the taxpayer owns stock of such corporation which 
            would meet the requirements of subparagraph (A) if ``20 
            percent'' were substituted for ``50 percent'' each place it 
            appears in such subparagraph, and
                (ii) stock meeting the requirements of subparagraph (A) 
            is owned by 5 or fewer corporate shareholders.

    (3) Special rule for stock in a bank or bank holding company

        (A) In general

            If, as of the beginning of the ex-dividend date, the 
        taxpayer owns stock of any bank or bank holding company having a 
        value equal to at least 80 percent of the total value of the 
        stock of such bank or bank holding company, for purposes of 
        paragraph (2)(A)(i), the taxpayer shall be treated as owning any 
        stock of such bank or bank holding company which the taxpayer 
        has an option to acquire.

        (B) Definitions

            For purposes of subparagraph (A)--
            (i) Bank

                The term ``bank'' has the meaning given such term by 
            section 581.
            (ii) Bank holding company

                The term ``bank holding company'' means a bank holding 
            company (within the meaning of section 2(a) of the Bank 
            Holding Company Act of 1956).

              (4) Treatment of certain preferred stock

        For purposes of determining whether the requirements of 
    subparagraph (A) or (B) of paragraph (2) or of subparagraph (A) of 
    paragraph (3) are met, stock described in section 1504(a)(4) shall 
    not be taken into account.

(d) Average indebtedness percentage

    For purposes of this section--

                           (1) In general

        Except as provided in paragraph (2), the term ``average 
    indebtedness percentage'' means the percentage obtained by 
    dividing--
            (A) the average amount (determined under regulations 
        prescribed by the Secretary) of the portfolio indebtedness with 
        respect to the stock during the base period, by
            (B) the average amount (determined under regulations 
        prescribed by the Secretary) of the adjusted basis of the stock 
        during the base period.

    (2) Special rule where stock not held throughout base period

        In the case of any stock which was not held by the taxpayer 
    throughout the base period, paragraph (1) shall be applied as if the 
    base period consisted only of that portion of the base period during 
    which the stock was held by the taxpayer.

                     (3) Portfolio indebtedness

        (A) In general

            The term ``portfolio indebtedness'' means any indebtedness 
        directly attributable to investment in the portfolio stock.

        (B) Certain amounts received from short sale treated as 
                indebtedness

            For purposes of subparagraph (A), any amount received from a 
        short sale shall be treated as indebtedness for the period 
        beginning on the day on which such amount is received and ending 
        on the day the short sale is closed.

                           (4) Base period

        The term ``base period'' means, with respect to any dividend, 
    the shorter of--
            (A) the period beginning on the ex-dividend date for the 
        most recent previous dividend on the stock and ending on the day 
        before the ex-dividend date for the dividend involved, or
            (B) the 1-year period ending on the day before the ex-
        dividend date for the dividend involved.

(e) Reduction in dividends received deduction not to exceed allocable 
        interest

    Under regulations prescribed by the Secretary, any reduction under 
this section in the amount allowable as a deduction under section 243, 
244, or 245 with respect to any dividend shall not exceed the amount of 
any interest deduction (including any deductible short sale expense) 
allocable to such dividend.

(f) Regulations

    The regulations prescribed for purposes of this section under 
section 7701(f) shall include regulations providing for the disallowance 
of interest deductions or other appropriate treatment (in lieu of 
reducing the dividend received deduction) where the obligor of the 
indebtedness is a person other than the person receiving the dividend.

(Added Pub. L. 98-369, div. A, title I, Sec. 51(a), July 18, 1984, 98 
Stat. 562; amended Pub. L. 99-514, title VI, Sec. 611(a)(4), title 
XVIII, Sec. 1804(a), Oct. 22, 1986, 100 Stat. 2249, 2798; Pub. L. 100-
203, title X, Sec. 10221(d)(2), Dec. 22, 1987, 101 Stat. 1330-409; Pub. 
L. 100-647, title I, Sec. 1012(l)(1), Nov. 10, 1988, 102 Stat. 3513.)

                       References in Text

    Section 243(c)(4), referred to in subsec. (b)(1), was redesignated 
section 243(d)(4) by Pub. L. 100-203, title X, Sec. 10221(b), 101 Stat. 
1330-408.
    The Small Business Investment Act of 1958, referred to in subsec. 
(b)(2), is Pub. L. 85-699, Aug. 21, 1958, 72 Stat. 689, as amended, 
which is classified principally to chapter 14B (Sec. 661 et seq.) of 
Title 15, Commerce and Trade. For complete classification of this Act to 
the Code, see Short Title note set out under section 661 of Title 15 and 
Tables.
    Section 2(a) of the Bank Holding Company Act of 1956, referred to in 
subsec. (c)(3)(B)(ii), is classified to section 1841(a) of Title 12, 
Banks and Banking.


                               Amendments

    1988--Subsec. (a). Pub. L. 100-647 struck out at end ``The preceding 
sentence shall be applied before any determination of a ratio under 
paragraph (1) or (2) of section 245(a).''
    1987--Subsec. (a)(1). Pub. L. 100-203 substituted ``70 percent (80 
percent in the case of any dividend from a 20-percent owned corporation 
as defined in section 243(c)(2))'' for ``80 percent''.
    1986--Subsec. (a). Pub. L. 99-514, Sec. 1804(a), substituted ``or 
245(a)'' for ``or 245'' and inserted ``The preceding sentence shall be 
applied before any determination of a ratio under paragraph (1) or (2) 
of section 245(a).''
    Subsec. (a)(1). Pub. L. 99-514, Sec. 611(a)(4), substituted ``80 
percent'' for ``85 percent''.


                    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 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

    Amendment by section 611(a)(4) of Pub. L. 99-514 applicable to 
dividends received or accrued after Dec. 31, 1986, in taxable years 
ending after such date, see section 611(b) of Pub. L. 99-514, set out as 
a note under section 246 of this title.
    Amendment by section 1804(a) 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

    Section 51(c) of Pub. L. 98-369 provided that: ``The amendments made 
by this section [enacting this section] shall apply with respect to 
stock the holding period for which begins after the date of the 
enactment of this Act [July 18, 1984] in taxable years ending after such 
date.''


           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, 854, 864 of this title.
