Kimco: California Rejected Two Tax Benefits for the Same Dividends

The majority allowed elimination but required a corresponding DPD adjustment

In Appeal of Kimco Realty Corporation and Subsidiaries, 2026-OTA-482P, the Office of Tax Appeals held that qualified intercompany dividends could be eliminated under Revenue and Taxation Code section 25106 but could not also support a dividends-paid deduction for California tax purposes. A two-judge majority sustained the additional tax using reasoning different from the Franchise Tax Board’s approach. Judge Greg Turner dissented.

The original opinion issued January 27, 2026. OTA denied rehearing on July 22 in 2026-OTA-483P. Both appeared in the October official posting, and the current official listing labels both Pending Precedential. The posting date, opinion dates, and present designation are separate facts. These opinions should not be described as finally designated precedential merely because their numbers end in P.

Why the same dividends entered the California calculation twice

Kimco was a REIT owning shopping centers through subsidiaries. Its taxable REIT subsidiary, KRS, was part of its California unitary combined-reporting group for 2014 and 2015. The federal REIT returns did not include KRS. KRS paid qualified dividends to Kimco, and Kimco distributed its federal taxable income to shareholders and claimed a federal dividends-paid deduction, or DPD.

The California return calculation began with federal REIT income after the DPD. Kimco then eliminated the qualified intercompany dividends under section 25106. OTA’s factual findings explain that the dividends had already been removed from the California starting figure through the DPD before the additional elimination entry. Original opinion, pages 2–3.

The majority read the elimination and conformity provisions together

The majority agreed that section 25106 required elimination of qualifying dividends. But it also relied on that provision’s direction that eliminated dividends not be taken into account in determining the tax of any member of the unitary group. Revenue and Taxation Code section 24870 adopts federal REIT provisions subject to exceptions elsewhere in California’s Corporation Tax Law.

Reading those provisions together, the majority concluded that federal conformity did not permit the same eliminated dividends to generate a second California benefit through the DPD. It allowed elimination and required a California adjustment adding back the related DPD. That reached the tax amount sustained by FTB even though FTB had denied elimination while allowing the DPD. Original opinion, pages 3–5.

The majority also explained why its approach did not impose the duplicate taxation alleged by Kimco. In its account, the subsidiary’s earned income remained taxed at the entity level, while dividends later distributed to shareholders could be taxed at the shareholder level. The question was not whether a REIT generally enjoys a DPD, but how these particular subsidiary dividends interacted with the combined report. Original opinion, pages 5–6.

The dissent saw an unauthorized change to a statutory deduction

Judge Turner viewed the provisions as operating at different stages. California’s REIT rules, in his reading, conformed to the federal measure of the DPD without the adjustment the majority required. Section 25106 prevented renewed recognition of income moving within the unitary group; it did not give OTA a general power to change a deduction because the combined result appeared too favorable.

The dissent emphasized that a California combined report does not erase each member’s separate taxable identity and argued that an explicit legislative change was needed to alter the DPD’s measure. It therefore would have found for the appellants. Dissent, pages 8–12. This was a disagreement about statutory operation and legislative authority, not merely a disagreement about the fairness of a tax benefit.

Rehearing reinforced the majority’s statutory route

On rehearing, OTA again read sections 24870 and 25106 together. It explained that once dividends were eliminated, they could not be reused for the DPD. The rehearing opinion, pages 2–3, rejected the contention that this adjustment lacked a California statutory basis.

The panel also declined FTB’s request to modify the rationale to align treatment of REITs with regulated investment companies. The legislation cited by FTB specifically addressed RICs, and the panel said it could interpret but not rewrite that legislation. The petition was denied. That limit is part of the decision’s significance alongside the rejection of Kimco’s position.

The disposition and the remaining limits

The original disposition allowed the section 25106 elimination but disallowed the DPD for the same qualified dividends and otherwise sustained FTB’s actions. Because Kimco did not prevail on the principal issue, no adjustment of NOL carryovers was needed on the contingent issue presented. The rehearing decision did not reverse that result.

These opinions address specified dividends in a California REIT combined-reporting setting. They do not resolve every corporate dividend deduction, every REIT distribution, or an unrelated NOL claim. The pending precedential designation should be checked again before a filing.

Our REIT return-review guide explains how to trace the dividend flow and California adjustments. A tax review should identify the actual entities, income stream, and return entries before applying either side’s statutory analysis.