Rev. Proc. 71-35

Section 1. Background and Purpose.

.01 Section 4.01 of Revenue Procedure 65-17, C.B. 1965-1, 833, as amplified by Revenue Procedure 65-31, C.B. 1965-2, 1024, and as amended by Revenue Procedure 65-17, Amendment 1, C.B. 1966-2, 1211, and as amplified by Revenue Procedure 70-23, C.B. 1970-2, 505, provides that dividends may be excluded from gross income where either: the domestic taxpayer receiving the dividends controls directly or indirectly (at least 80 percent of the voting power) the corporation to which the section 482 allocation is made; or the domestic taxpayer receiving the dividends is controlled (80 percent or more of the voting power) directly or indirectly by the corporation whose income was increased as a result of the section 482 allocation.

.02 Requests have been received for amplification of the dividends exclusion provision of Revenue Procedure 65-17, as amplified by Revenue Procedure 70-23. This Revenue Procedure provides amplification of Revenue Procedure 65-17.

Sec. 2. Adjustments To Be Made or Allowed.

Dividends may be excluded from the gross income of a first-tier subsidiary (80 percent or more voting power owned directly or indirectly by its domestic parent) where the dividends are received from the first-tier's partially owned second-tier subsidiary even though the section 482 allocation is made between the second-tier subsidiary and another first-tier subsidiary of the same domestic parent who also controls directly or indirectly at least 80 percent of the voting power of the first-tier subsidiary whose income was increased as a result of the section 482 allocation.

Sec. 3. Effect on Other Documents.

Revenue Procedure 65-17, as amplified and amended, is further amplified.