Opinion ID: 1353007
Heading Depth: 1
Heading Rank: 8

Heading: the nevada bell dividends

Text: Although Pacific took a contrary position in the earlier stages of this litigation, it concedes that, in the light of our Safeway decision, it, as a domiciliary corporation, must include in its income the dividends received from its wholly owned subsidiary, Nevada Bell. Those dividends totalled $2,329,250. Pacific contends that, assuming its position as to intercompany dividends is rejected in other respects, it is entitled to offset this income by interest expense. The computation involved is the fourth step described above; the second sentence of subsection (b) provides that interest expense not allowed as a deduction under the first sentence shall be offset against interest and dividend income ... not subject to allocation by formula. The board does not dispute that an offset is permissible. The controversy relates to the amount of the offset. Pacific claims that it may offset the dividend income from Nevada Bell by the entire $226,715,715 interest expense of the Bell System, by Pacific's allocable portion of the entire expense (10.3422 percent of $226,715,715 = $23,447,393) or by the interest actually and directly paid by Pacific, $29,838,722. Under any of the three computations, the dividend income from Nevada Bell will be cancelled entirely. The board allowed a deduction of $686,949 for interest expense against the Nevada Bell dividends. The board reached this figure on the theory that, since the total interest, which was to be offset by the total dividends under subsection (b), was exceeded by those dividends, a pro rata offset was appropriate. The amount of total interest was approximately 30 percent of the amount of total dividends; thus for each dollar of dividends included in taxable dividend income Pacific was permitted an interest expense deduction of approximately 30 cents. The second sentence of subsection (b) provides that interest expense shall be offset against dividend income. The term dividend income, as we have seen, includes all of the dividends whether taxable or not, and the interest expense includes all of the interest whether paid by Pacific or not. Where, as here, the dividends exceed the interest, the pro rata approach of the board is correct. The judgment is reversed.