§ 1.244-2
Computation of deduction.
(a) General rule. Section 244(a) provides a formula for the computation of the deduction for dividends received on the preferred stock of a public utility. For purposes of this computation, the normal tax rate referred to in section 244(a)(2)(B) shall be determined without regard to any additional tax imposed by section 1562(b). See section 1562(b)(4). The deduction computed under section 244(a) is subject to the limitation provided in section 246.
(b) Qualifying dividends. Section 244(b) provides that in the case of dividends received on the preferred stock of a public utility in taxable years ending after December 31, 1963, which are “qualifying dividends”(as defined in section 243(b)(1), but determined without regard to section 243(c)(4)), the computation of the deduction for dividends received shall be made by applying the formula provided by section 244(a) separately to such qualifying dividends. For such purposes, 100 percent shall be used in lieu of the 85 percent specified in section 244(a)(3).
(c) Examples. The computation of the deduction provided in section 244 may be illustrated by the following examples:
Example 1.
Corporation X, which files its income tax returns on the calendar year basis, received in 1965 $100,000 as dividends on the preferred stock of corporation Y, a public utility corporation which is subject to taxation under chapter 1 of the Code. The deduction provided in section 247 is allowable to Y, the distributing corporation, with respect to these dividends and they are not “qualifying dividends”(as defined in section 243(b)(1) but determined without regard to section 243(c)(4)). The corporation normal tax rate and the surtax rate for the calendar year 1965 are 22 percent and 26 percent, respectively. The deduction allowable to X under section 244(a) for the year 1965 with respect to these dividends is $60,208.33, computed as follows:
Dividends received on preferred stock of corporation Y
$100,000.00
Less: The fraction specified in section 244(a)(2): 14/48×$100,000
29,166.67
Amount subject to 85-percent deduction
70,833.33
Deduction—85 percent of $70,833.33
60,208.33
The result would be the same if X or Y(or both) were subject to the 6-percent additional tax imposed by section 1562(b) for 1965.
Example 2.
Assume the same facts as in Example 1 and also assume that in 1965 corporation X received $200,000 as dividends on the preferred stock of Corporation Z, a public utility corporation which is subject to taxation under chapter 1 of the Code. Assume further that such dividends are “qualifying dividends” (as defined in section 243(b)(1) but determined without regard to section 243(c)(4)). The deduction provided in section 247 is allowable to Z, the distributing corporation, with respect to these dividends. The deduction allowable to X under section 244 for the year 1965 is $201,875, computed as follows:
Deduction allowable under section 244(a) with respect to the dividend received from Y (see Example 1)
$60,208.33
Deduction allowable under section 244(b) with respect to the dividend received from Z: Qualifying dividends received on preferred stock of corporation Z
200,000.00
Less: The fraction specified in section 244(a)(2): 14/48×$200,000
58,333.33
Deduction
141,666.67
Deduction allowable under section 244 for 1965
201,875.00
[T.D. 6992, 34 FR 825, Jan. 18, 1969]