Can a California REIT Group Use Dividend Elimination and a Dividends-Paid Deduction on the Same Dividends?

Trace the same dividends through both claimed tax benefits

According to the current Kimco opinions, a California REIT combined-reporting group cannot both eliminate qualified intercompany dividends under Revenue and Taxation Code section 25106 and retain a dividends-paid deduction for those same dividends. The OTA majority allowed elimination but required a corresponding California DPD adjustment. One judge dissented.

The rule is specific to the interaction of these provisions and this dividend stream. It does not mean every deduction associated with a dividend is disallowed. Before changing a return or transaction, identify which entity earned the income, which entity paid and received the dividend, and where each item enters the federal and California calculations. The case analysis explains both the majority and dissent.

Understand the two operations separately

A dividends-paid deduction generally allows a qualifying REIT to deduct qualifying distributions to shareholders under the federal rules. California intercompany dividend elimination addresses dividends moving between members of a unitary group and paid from the relevant unitary earnings. One concerns a REIT’s distributions; the other concerns income moving within a combined group.

In Kimco, the federal REIT calculation already reflected a DPD associated with income that included dividends from a taxable REIT subsidiary. The California calculation used that federal figure and then made an intercompany-dividend elimination. The majority concluded that the same dividends could not support both reductions in this setting. Original opinion, pages 2–5.

The majority’s route differed from FTB’s. It did not simply deny the mandatory elimination. It allowed elimination and required adjustment of the DPD for California. That distinction matters when reviewing workpapers: Two methods can produce a similar tax amount while relying on different treatment of specific return entries.

Build a dividend map tied to the actual returns

• The payer and source: Identify the taxable REIT subsidiary and the earnings from which the dividend was paid. Do not assume every payment within a group qualifies for the same elimination.
• The recipient: Identify the REIT and which entities belonged to the California combined group for each year. Federal consolidated-return treatment may differ.
• The federal DPD: Trace the amount into the federal REIT return and supporting distribution calculation.
• The California starting figure: Determine whether it already reflects that DPD before any separate adjustment.
• The elimination and adjustment: Match the section 25106 entry and any DPD modification to the same underlying dividend stream.

This is an analytical sequence rather than a return-preparation instruction for every REIT. The taxable years, entity structure, California modifications, and applicable forms must be checked. A payment’s label in the general ledger is not enough to establish either statutory treatment.

Understand the competing reading before relying on a position

The dissent argued that California expressly conformed to the federal definition of REIT taxable income and the DPD without the majority’s adjustment. It viewed section 25106 as a rule against recognizing intercompany income again, rather than authority to recalculate an otherwise permitted deduction. In that view, the Legislature—not OTA—would need to change the deduction’s measure.

The majority instead relied on the conformity exception in section 24870 and the command in section 25106 against taking eliminated dividends into account again. The dissent identifies the precise statutory disagreement, but it did not carry the disposition. A current position should account for the majority and rehearing result rather than cite only the favorable separate opinion.

What the rehearing decision adds

The July rehearing opinion rejected Kimco’s contrary-to-law challenge and reaffirmed the need for the California adjustment. It also declined FTB’s request to reshape the rationale to match rules for regulated investment companies, explaining that the cited legislation addressed RICs specifically. Rehearing opinion, pages 2–4.

That combination is useful: OTA rejected the taxpayer’s dual-benefit position while also refusing the agency’s proposed expansion beyond the statutory language. The opinions should not be read as a general license to eliminate any tax outcome the agency regards as undesirable.

Check status and preserve the assessment trail

The original opinion was issued January 27, 2026, and rehearing was denied July 22. Both were posted in the October collection. As checked for this revision, the official listing marks 2026-OTA-482P and 2026-OTA-483P Pending Precedential. Preserve that qualification when describing their authority and recheck the status before relying on them in a filing.

For a review of a California REIT assessment or return position, bring the entity chart, dividend and earnings records, federal and California returns, DPD and combined-reporting workpapers, and FTB notices. Those materials permit a focused analysis of the actual income stream and disputed adjustment, while preserving the separate protest or appeal requirements applicable to the notice.