§547 Deduction for deficiency dividends

Summary

If a final decision shows a taxpayer owes the personal holding company tax under section 541, the taxpayer may take a deduction for certain dividends paid after that decision. These “deficiency dividends” are dividends paid on or after the decision and before the taxpayer files a claim, that would have counted in the section 561 dividends-paid deduction for the taxable year. The dividends must be paid within 90 days of the decision. The deduction is allowed when the claim is filed, and the claim must be filed within 120 days after the decision. The deduction lowers the tax but does not reduce interest, extra amounts, or penalties. If the deduction creates an overpayment, a credit or refund is treated as if two years remained in the refund period, but no interest is paid on that refund. A “determination” means a final court decision, a closing agreement under section 7121, or an agreement signed under Treasury rules. Filing the claim pauses the usual two-year assessment and collection period under section 6501. Collection of the tax and related amounts is generally stayed until 120 days after the decision, and if a claim is filed the part of the tax not reduced by the deduction is stayed until the claim is denied. No deduction is allowed if the decision finds the deficiency was caused by fraud to evade tax or by willfully failing to file.