Publication Title

Brigham Young University Law Review


accumulated earnings tax, personal holding company tax, tax deductions

Document Type



The dividends paid deduction provided for in section 561 of the Internal Revenue Code is of vital importance to any corporation that is subject to the accumulated earnings tax or the personal holding company tax. Either of these taxes, if applicable, is imposed in addition to the federal income taxes otherwise payable by the corporation.

Since the accumulated earnings tax is substantial and the personal holding company tax is downright confiscatory, a corporation must do whatever is necessary legally to avoid paying these additional taxes. A corporation subject to either of the taxes generally can avoid them only by taking advantage of the dividends paid deduction, which directly reduces the income subject to the taxes.

This article analyzes the issue of whether the dividends paid deduction should equal the adjusted tax basis of property distributed in kind, as required by regulation 1.562-1, or the amount of dividend income taxable to the shareholder as a result of the distribution.

The conclusion of this article is that the deduction should equal the dividend income taxable to the shareholder. Whereas Treasury regulations generally are entitled to deference when judicially reviewed, a court could justifiably conclude that regulation 1.562-1 is invalid because it does not focus on the objective of the personal holding company tax and the accumulated earnings tax and is not supported by the statutory scheme of the Code. Therefore, the regulation should be changed or invalidated and, if necessary, the Code should be amended to remove any remaining ambiguity.



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