Legal Ruling 1958-211

Dividends: Deductibility Under Section 24402

Dividends paid from earnings and profits which have not been included in the measure of the tax are not deductible under the provisions of Section 24402.

During 1955 X corporation adopted a plan of complete liquidation. Within twelve months of the adoption of the plan, X sold certain assets at a substantial gain. The gain was excluded from the measure of the tax under the provisions of Section 24512. X thereafter declared a dividend payable to taxpayer. At the time the dividend was declared X had sufficient earnings and profits accumulated from sources other than the sale of assets with which to pay the dividend. These amounts had been included in the measure of the tax. Advice is requested as to the proper method of computing the deductibility of the X dividend under Section 24402.

In determining the deductibility of dividends for a given year, it is necessary to determine the ratio that the total earnings and profits received during the year bears to the earnings and profits which have been included in the measure of the tax. The resulting percentage is applied to the dividends paid to determine the deductible portion under Section 24402.

In the instant case the gain realized by X corporation from the sale of its assets became a part of the earnings and profits from which dividends could be paid. They were properly includible, therefore, in the denominator for the dividend computation. Since they were not a part of the earnings and profits which was included in the measure of the tax they were properly omitted from the numerator for the dividend computation. The resulting ratio is the percentage of the dividend which is deductible.

The fact that X had other earnings and profits from which the dividend could have been paid would have no effect on our computation. Under Section 24495 (b) dividends are paid from the total earnings and profits earned for a particular year and not from just a part thereof. Since paid from the total fund we must use the total amount for our denominator in the dividend computation.