Published in the Tax Management Portfolio, Dividends — Cash and Property, No. 764-4th (Reinstein and Goldberg).
Tax Management Portfolio, Dividends — Cash and Property, No. 764-4th, discusses the tax consequences of distributions, of either cash or other property (in kind distributions), from a distributing corporation to its shareholders. Distributions made from a corporation's earnings are generally referred to as taxable dividends.
If a corporation makes a distribution, the amount received by its shareholders is taxable, as either net capital gain or ordinary income, to the extent the distribution is made out of the corporation's earnings and profits. A distribution in excess of earnings and profits reduces the shareholder's basis in its stock; any residual amount of the distribution is treated as gain from the sale or exchange of property. For tax years beginning after 2002, individuals report the receipt of “qualified dividend income” as capital gain. Corporate shareholders may use §243, the dividends received deduction, to reduce the amount of the distribution treated as a dividend from its taxable income in the year of the distribution depending on the level of the corporate shareholder's ownership of the distributing corporation.
Distributions of property, other than cash, may cause the distribution corporation to recognized gain (but not loss) on distributions where the fair market value is greater than the tax basis of the assets distributed under §311.
In addition to discussing the pertinent Code and regulation provisions that set forth the rules regarding corporate distributions, this Portfolio analyzes: (1) the taxability of dividend distributions to both corporate and noncorporate distributees; (2) the dividends received deduction; (3) the basis reduction and gain recognition for extraordinary dividends under §1059; (4) the tax effect on the distributing corporation of dividends in kind; and (5) the reporting and withholding requirements associated with corporate distributions.
The authors would like to thank Joshua Goldstein for his assistance in preparing this Portfolio.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.