¶ … Dividends Received Deduction, or DRD is a tax deduction that is typically received by a corporation on the dividends paid to it by companies in which it has some form of ownership. The logic behind this is to reduce the consequences of what might be triple taxation. This triple taxation would occur because the company paying the dividend does this with after-tax money, and the receiving company is subject to income tax on the money received as dividend income. If the company that receives the dividend decides to pay out to the shareholder, then there is more tax obligation, or a single variable being taxed three times. For example, if a company owns less than 20% of another company, it can deduct up to 70% of...

In order for the deduction to apply, though, the corporation paying the dividend must also be liable for tax, or be subject to the double taxation that the deduction is intended to prevent. There are limitations to the DRD, though. The dividends received is limited to the corporate shareholder's taxable income per §246(b) of the Internal Revenue Service Code. The corporation's shareholder taxable income needs to be computed without using net operating losses, capital loss, and the dividends received deduction; but does not apply…