Frequently Asked Questions
Who is eligible for the Net Operating Loss Exception to DRD Limitation?
A corporation must have a net operating loss for the taxable year as determined under section 172.
How does the Net Operating Loss Exception to DRD Limitation work?
The 50% or 65% taxable income limitation on the Dividends Received Deduction (DRD) does not apply for any taxable year in which the corporation has a Net Operating Loss (NOL).
What law authorizes the Net Operating Loss Exception to DRD Limitation?
The Net Operating Loss Exception to DRD Limitation is authorized under IRC §246(b)(2) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §246
Source: Internal Revenue Code, Title 26, United States Code
§ 246. Rules applying to deductions for dividends received(a) Deduction not allowed for dividends from certain corporations(1) In generalThe deductions allowed by sections 243 11 So in original. Probably should be followed by a comma. 245, and 245A 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 profitsIn 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 profitsIn 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 243To 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) DefinitionsFor purposes of this paragraph—(i) FHLBThe term “FHLB” means any Federal Home Loan Bank.
(ii) FHLMCThe term “FHLMC” means the Federal Home Loan Mortgage Corporation.
(iii) Taxable year of FHLBThe taxable year of an FHLB shall, except as provided in regulations prescribed by the Secretary, be treated as the calendar year.
(iv) Earnings and profitsThe 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
Showing first 3,000 characters of full section text.