@051 CHAP 8

       ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿
       ³  DIVIDENDS RECEIVED DEDUCTION FOR CORPORATIONS  ³
       ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ

Corporations (other than S corporations) are entitled to a
significant tax break on their investments in dividend-
paying common or preferred stocks.  A so-called "C corpor-
ation" (which is simply a regular corporation that hasn't
made an S corporation election) gets to exclude from tax-
able income 70% of the dividends it receives from another
corporation (80% if it owns 20% or more of the stock of the
other corporation).  This can be a significant tax benefit
of being a C corporation if your company has funds to in-
vest, as compared to an S corporation or an unincorporated
business.

    ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿
    ³EXAMPLE:  If your corporation receives $1,000 in divi-³
    ³dends from an investment in General Motors stock, only³
    ³$300 would be taxable for federal income tax purposes.³
    ³Even if your corporation were in the 34% corporate tax³
    ³bracket,  the federal tax on those  dividends would be³
    ³34% of $300, or $102, which is a maximum effective tax³
    ³rate of only 10.2% of the dividends received.  The ef-³
    ³fective tax rate would only be 4.5% if the corporation³
    ³is in the 15% tax bracket.                            ³
    ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ

Note, however, that under the Tax Reform Act of 1984, this
deduction will be reduced if your corporation borrows money
(on which it pays interest) to purchase dividend-paying
stocks.

@IF118xx]NOTE: @NAME is not a C corporation.
@IF118xx]
@IF118xx]Thus, even though your business is incorporated, as an S
@IF118xx]corporation, it will not qualify for the dividends received
@IF118xx]deduction on any dividend income it receives.
@IF118xx]
@CODE: HI CA
@CODE:NF

      DIVIDENDS RECEIVED DEDUCTION DIFFERS IN @STATE

@CODE:OF
@CODE: HI
Hawaii does not allow a "dividends received" deduction to
corporations, generally, unlike the federal 70% or 80% de-
duction.  However, Hawaii does allow an 80% dividends re-
ceived deduction in certain limited situations, such as
the following:

    . Dividends received from banks and insurance
      companies doing business in Hawaii;

    . Dividends received from a corporation that
      does at least 15% of its business in Hawaii;
      or

    . Dividends received from a corporation that is
      95%-owned by corporations doing business in
      Hawaii, if the paying corporation is subject
      to tax in another jurisdiction (another state,
      for example).

@CODE:OF
@CODE: CA
California allows corporations a dividends received deduc-
tion of a sort, which, as a result of 1990 legislation, is
somewhat similar to the 70% or 80% deduction allowed under
the federal tax law.  Under the California franchise tax
law, the percentage of dividends received that may be non-
taxable is based on the percentage of the income of the pay-
or corporation that is subject to tax in California (a per-
centage that can be obtained by contacting the California
Franchise Tax Board), which percentage, once determined, is
then multiplied by another percentage, based on the amount
of the stock of the payor that is owned by the taxpayer
corporation, as follows:

     Over 50% of stock owned    -   100%
     20% to 50% stock ownership -    80%
     Under 20% stock ownership  -    70%

The resulting percentage is the portion of the total divi-
dend that is non-taxable to the recipient corporation under
California tax law.  For example, if CALCO owns under 20%
of the stock of XYZ Corporation, and 30% of XYZ's income is
subject to tax in California, CALCO would be entitled to
a deduction of 70% x 30%, or 21% of any dividends it re-
ceived from XYZ.