The 7% Solution: Structured Dividend Received Deduction Transactions Face Internal Revenue Service Audit Scrutiny

Keywords: Structured dividend, IRS, corporate taxpayers, corporate tax

It appears that a 7% effective tax rate can have addictive properties to corporate taxpayers in much the same way that the 7% cocaine solution had to Sherlock Holmes in Nicholas Meyer's 1974 novel entitled, The Seven Percent Solution. Specifically, Section 243(c)(1) of the Internal Revenue Code of 1986, as amended (the "Code") provides corporate taxpayers who hold at least 20% of the outstanding stock of a US corporation, determined by voting power and value, with a deduction equal to 80% of the amount of dividends received on such stock.¹ This deduction, referred to as the dividend received deduction or "DRD," currently lowers the effective tax rate on intercorporate dividends to 7%.² Recently, the Internal Revenue Service (the "IRS") released three separate pieces of audit guidance in which the IRS challenged the right of corporate taxpayers to claim DRDs in various transactions. In the same