Federal Tax

Dividends — Cash and Property (Portfolio 764)

  • This Portfolio discusses the tax consequences of corporate distributions-either money or other assets (in kind distributions)-to the distributing corporation and its shareholders.

Description

Bloomberg Tax Portfolio, Dividends — Cash and Property, No. 764, discusses the tax consequences of corporate distributions, of either money or other assets (in kind distributions), to the distributing corporation and its shareholders. Distributions made from a corporation’s earnings are generally referred to as dividends.

If a corporation makes a dividend 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. Any distribution in excess of earnings and profits reduces the shareholder’s basis in its stock; any remaining amount is treated as gain from the sale or exchange of property. For taxable 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 effective tax rate on such income. Under §311, distributing corporations generally must recognize gain (but not loss) on distributions of appreciated property to their shareholders.

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.

Table of Contents

I. Introduction
II. Definition of “Dividends”
III. Accounting for Dividends
IV. Types of Dividends
V. Tax Treatment for Noncorporate Shareholders
VI. Dividends Received Deduction
VII. Basis Reduction for Extraordinary Dividends Received by Corporate Shareholders – § 1059
VIII. Taxation of Distributing Corporation
IX. Dividends – Members of a Consolidated Group
X. Dividends Related to Stock Sales
XI. Reporting and Withholding

Anjanette Frias
Anjanette Frias
Tax Management Portfolio Authors
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