Assume that ABC is a corporate shareholder of DEF Corporation. In this case, the dividends received by ABC are taxable at the corporate tax rates. Additionally, ABC may be subject to another level of tax when it decides to distribute its earnings-after tax to its shareholders.

In order to provide some relief to such corporate shareholders who might be subject to more than two levels of taxation, Congress allows the Dividend Received Deduction (DRD). The corporate receiving the dividends can claim a part of it from its taxable income in order to mitigate the effect of more than two levels of taxation when the corporation distributes dividends to the shareholders. The DRD rates may be 70%, 80%, or 100% of the dividend received, which depends on the extent of ownership of ABC in the DEF Corporation.