(a) Amount of deduction
In the case of a public utility, there shall be allowed as a deduction an amount computed as follows:
(1) First determine the amount which is the lesser of—
(A) the amount of dividends paid during the taxable year on its preferred stock, or
(B) the taxable income for the taxable year (computed without the deduction allowed by this section).
(2) Then multiply the amount determined under paragraph (1) by the fraction—
(A) the numerator of which is 14 percent, and
(B) the denominator of which is that percentage which equals the highest rate of tax specified in section 11(b).
For purposes of the deduction provided in this section, the amount of dividends paid shall not include any amount distributed in the current taxable year with respect to dividends unpaid and accumulated in any taxable year ending before October 1, 1942. Amounts distributed in the current taxable year with respect to dividends unpaid and accumulated for a prior taxable year shall for purposes of this subsection be deemed to be distributed with respect to the earliest year or years for which there are dividends unpaid and accumulated.
For purposes of this section and section 244—
(1) Public utility
The term “public utility” means a corporation engaged in the furnishing of telephone service or in the sale of electrical energy, gas, or water, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof or by an agency or instrumentality of the United States or by a public utility or public service commission or other similar body of the District of Columbia or of any State or political subdivision thereof.
(2) Preferred stock
(A) In general
The term “preferred stock” means stock issued before October 1, 1942, which during the whole of the taxable year (or the part of the taxable year after its issue) was stock the dividends in respect of which were cumulative, limited to the same amount, and payable in preference to the payment of dividends on other stock.
(B) Certain stock issued on or after October 1, 1942
Stock issued on or after October 1, 1942, shall be deemed for purposes of this paragraph to have been issued before October 1, 1942, if it was issued to refund or replace bonds or debentures issued before October 1, 1942, or to refund or replace other preferred stock (including stock which is preferred stock by reason of this subparagraph or subparagraph (D)), but only to the extent that the par or stated value of the new stock does not exceed the par, stated, or face value of the bonds or debentures issued before October 1, 1942, or the other preferred stock, which such new stock is issued to refund or replace.
(C) Determination under regulations
The determination of whether stock was issued to refund or replace bonds or debentures issued before October 1, 1942, or to refund or replace other preferred stock, shall be made under regulations prescribed by the Secretary.
(D) Issuance of stock
For purposes of subparagraph (B), issuance of stock includes issuance either by the same or another corporation in a transaction which is a reorganization (as defined in section 368(a)) or a transaction subject to part VI of subchapter O as in effect before its repeal (relating to exchanges in SEC obedience orders), or the respectively corresponding provisions of the Internal Revenue Code of 1939.
(Aug. 16, 1954, ch. 736, 68A Stat. 75; Pub. L. 94–455, title XIX, §1901(a)(35), Oct. 4, 1976, 90 Stat. 1770; Pub. L. 95–600, title III, §301(b)(4), Nov. 6, 1978, 92 Stat. 2820; Pub. L. 101–508, title XI, §11801(c)(8)(C), Nov. 5, 1990, 104 Stat. 1388–524; Pub. L. 104–188, title I, §1704(t)(49), Aug. 20, 1996, 110 Stat. 1890; Pub. L. 109–135, title IV, §402(a)(5), Dec. 21, 2005, 119 Stat. 2610.)
References in Text
The Internal Revenue Code of 1939, referred to in subsec. (b)(2)(D), is act Feb. 10, 1939, ch. 2, 53 Stat. 1, as amended. Prior to the enactment of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], the 1939 Code was classified to former Title 26, Internal Revenue Code. For table of comparisons of the 1939 Code to the 1986 Code, see Table I preceding section 1 of this title.
2005—Subsec. (b)(2)(D). Pub. L. 109–135 inserted “as in effect before its repeal” after “part VI of subchapter O”.
1996—Subsec. (b)(2)(D). Pub. L. 104–188 provided that section 11801(c)(8)(C) of Pub. L. 101–508 shall be applied as if “reorganizations” appeared instead of “reorganization” in the material proposed to be stricken. See 1990 Amendment note below.
1990—Subsec. (b)(2)(D). Pub. L. 101–508 which directed that “, a transaction to which section 371 (relating to insolvency reorganization) applies,” be struck out was executed by striking out “, a transaction to which section 371 (relating to insolvency reorganizations) applies,” after “(as defined in section 368(a))”. See 1996 Amendment note above.
1978—Subsec. (a)(2)(B). Pub. L. 95–600 substituted “the highest rate of tax specified in section 11(b)” for “the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11”.
1976—Subsec. (b)(2). Pub. L. 94–455 divided existing provisions into subpars. (A), (B), (C), and (D), added headings for subpars. (A), (B), (C), and (D), and, in subpar. (C) as so redesignated, substituted “prescribed by the Secretary” for “prescribed by the Secretary or his delegate”.
Effective Date of 2005 Amendment
Amendment by Pub. L. 109–135 effective as if included in the provisions of the Energy Policy Act of 2005, Pub. L. 109–58, to which it relates, but not applicable with respect to any transaction ordered in compliance with the Public Utility Holding Company Act of 1935 (15 U.S.C. 79 et seq.) before its repeal, see section 402(m) of Pub. L. 109–135, set out as an Effective and Termination Dates of 2005 Amendments note under section 23 of this title.
Effective Date of 1978 Amendment
Amendment by Pub. L. 95–600 applicable to taxable years beginning after Dec. 31, 1978, see section 301(c) of Pub. L. 95–600, set out as a note under section 11 of this title.
Effective Date of 1976 Amendment
Amendment by Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.
For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title.