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INTRODUCTION
The American Jobs Creation Act of 2004(1) added §965(2) to the Code providing a one-year 85% dividends received deduction (DRD) for cash dividends received by corporate U.S. shareholders from controlled foreign corporations (CFCs). The DRD is available only for extraordinary dividends up to a ceiling amount and to the extent the qualifying dividends are reinvested in the United States.
The House and Senate have introduced the 2004 Tax Technical Corrections Bill (2004 TTCA)3 containing amendments to §965. In addition, the Treasury and 1RS have issued a notice providing guidance concerning certain requirements to qualify for the DRD.4
This memorandum provides a descriptive overview of §965 (including the subsequently issued guidance), highlighting the aspects that are essential for obtaining the benefits of that provision.
ELECTION YEAR
The 85% DRD is temporary; it applies only to one taxable year. A corporate taxpayer may elect to have §965 apply to cash dividends received during either of the following two years:
* The taxpayer's last taxable year which begins before October 22, 2004; or
* The taxpayer's first taxable year that begins during the one-year period beginning on such date.5
For example, for calendar year taxpayers the election is available for either 2004 or 2005.6 A taxpayer elects to apply §965 to a taxable year by filing Form 8895 with its timely filed tax return (including extensions) for such taxable year.7
DIVIDENDS RECEIVED BY CORPORATE U.S. SHAREHOLDERS FROM CFCS
The 85% DRD is available only for dividends received by a U.S. shareholder from CFCs during the election year. A U.S. shareholder is a U.S. person that owns more than 10% of the voting stock in a CFC. Stock owned directly, indirectly, and constructively is taken into account for this purpose.8 The relevant determination date appears to be the day the dividend is received.9 All U.S. shareholders who are members of an affiliated group filing a consolidated return under §1501 are treated as one U.S. shareholder.10
Only corporate shareholders qualify for the DRD. Thus, individual U.S. shareholders and partnerships can not claim the DRD. Nevertheless, as described below, corporate partners in a partnership are eligible to for the DRD for certain CFC dividends received by the partnership.11
Only dividends received from a controlled foreign corporations are eligible for...