Corporation X, a domestic C corporation, owns 10% of the stock (by vote and value) of Corporation Y, another domestic corporation, and the two corporations are not members of the same affiliated group. During its 2025 tax year, Corporation X receives a $100,000 dividend from Corporation Y. Under IRC Section 243, what percentage of that dividend may Corporation X deduct as a dividends-received deduction, before considering any taxable-income limitation?
- 100%, because all dividends paid between domestic corporations are fully deductible before any income limitation applies
- 65%, the rate that applies once a corporate shareholder's ownership reaches the 20%-owned-corporation threshold
- 50%, the general rate that applies because Corporation X's 10% stake falls below the 20%-owned-corporation threshold
- 0%, because the dividends-received deduction is only available to insurance companies and other specially regulated corporate taxpayers
Why C? And why not the others?
Correct answer: C. 50%, the general rate that applies because Corporation X's 10% stake falls below the 20%-owned-corporation threshold
IRC Section 243(a)(1) sets the general dividends-received deduction rate at 50% for dividends from a domestic corporation in which the recipient owns less than 20% of the stock; the rate rises to 65% under Section 243(c) once the recipient's ownership reaches the 20%-owned-corporation threshold, and to 100% under Section 243(a)(3) only for qualifying dividends between members of the same affiliated group. Because Corporation X owns just 10% of Corporation Y and the two are not affiliated, the general 50% rate applies. The option stating 100% wrongly assumes every domestic-to-domestic dividend qualifies for full deduction, when the 100% rate is reserved for the affiliated-group case that does not exist here. The option stating 65% applies the 20%-owned-corporation rate to a shareholder that owns only half of that 20% threshold. The option stating 0% is wrong because the dividends-received deduction is a general mechanism available to ordinary C corporation shareholders receiving domestic dividends, not a special benefit limited to insurers.
Source: IRC Section 243(a) and (c)