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New ruling sheds light on scope of section 246A.



Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq.  section 246A reduces or eliminates the dividends-received deduction Dividends-received deduction

A corporate tax deduction on income allowed by company A that is in ownership of shares of company B and receives dividends on the shares of company B.
 with respect to dividends issued for "debt financed portfolio stock" (that is, stock for which debt is directly attributable).

Currently, there is little guidance on the relationship required between debt and a stock investment in order to invoke section 246A. In general, portfolio debt includes the following:

* A nonrecourse loan Nonrecourse loan

A loan for which no partner or related person bears the economic risk of loss. For example, if a partnership fails to repay a nonrecourse loan, the lender has no recourse against any partner except to foreclose of the assets used to secure the loan.
 secured by portfolio stock.

* An equity-financed block of stock used as collateral for a later borrowing when a sale of the stock (in lieu of borrowing) would have been reasonable.

Moreover, the mere coexistence co·ex·ist  
intr.v. co·ex·ist·ed, co·ex·ist·ing, co·ex·ists
1. To exist together, at the same time, or in the same place.

2.
 of debt and stock does not, by itself, invoke section 246A.

Letter ruling 9141006 sheds important new light on the contours of section 246A. The ruling concerns a corporation that sold equity and used a portion of the proceeds to acquire portfolio stock. Later it incurred bank debt to finance working capital and fund an acquisition. The taxpayer's accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying  and the acquired stock served as security for the bank debt.

The letter ruling, citing revenue ruling 88-66 (situation 1), concludes the bank debt is not portfolio debt because

* The portfolio stock was not used as collateral.

* The loan proceeds were used to finance an acquisition (a major non-recurring expenditure) in a new line of business.

Interestingly, the bank loan required the borrower to maintain a specified level of "quick assets Personal property that is readily marketable.

Quick assets are items, such as jewelry, that can be easily converted to cash for immediate use.
," and the portfolio stock served to meet that requirement. Nevertheless, this loan condition did not serve to invoke section 246A because it did not rise to the level of a security interest in the stock.

Observation: Apparently, section 246A, previously uncertain in scope, can never be invoked if portfolio stock does not serve as security for debt.
COPYRIGHT 1992 American Institute of CPA's
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Title Annotation:letter ruling 9141006 on dividends-received deduction
Author:Willens, Robert
Publication:Journal of Accountancy
Date:Jan 1, 1992
Words:283
Previous Article:Unpaid business payroll taxes.
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