PORTFOLIO

Dividends — Cash and Property (Portfolio 764)

Tax Management Portfolio, Dividends — Cash and Property, No. 764-3rd, 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.

Price: $400 Print

GET MORE WITH THE FULL PORTFOLIO LIBRARY

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive resource including 200+ federal tax Portfolios, practice tools, primary sources and timely news.

FREE TRIAL

DESCRIPTION

Tax Management Portfolio, Dividends — Cash and Property, No. 764-3rd, 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.


Buy Dividends — Cash and Property (Portfolio 764) now


AUTHORS

ANJANETTE T. FRIAS
Anjanette T. Frias, B.A. (cum laude), Creighton University (1993), J.D., Emory University School of Law (1996); member, Tennessee Bar Association (1996-2002); co-author, “Consolidated Return Election Offers Tax Advantages — With Complexity,” Practical Tax Strategies (Sept. 2001); co-author, 750 T.M., Corporate Overview (2004); Ernst & Young, LLP (1996-2001); Responder, Mergers & Acquisitions Segment, Ernst & Young's Online Tax Advisor (2001-2003).

GEORGE L. WHITE
George L. White, B.A., Holy Cross College (1958); M.B.A., University of Pennsylvania (1960); LL.B., Harvard University (1963); admitted to practice in Massachusetts; Certified Public Accountant, Massachusetts.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Definition of "Dividends"

A. Historical Origins

B. Significance of "Dividends"

C. Tax Definition of "Dividend"

1. Overview

a. Definition

b. Distributions Must Be Made to Person in Shareholder Capacity

c. Property Must Be Distributed

2. Potential Sources of Distribution

3. Treatment of Nondividend Distributions Under § 301

a. General Rule

b. Basis Reduction - Aggregation

4. Allocation of Earnings and Profits to Distributions

a. Current Earnings and Profits

b. Accumulated Earnings and Profits

c. Allocation of Earnings and Profits Among Two or More Classes of Stock

d. Allocation of Earnings and Profits Between Redemption Distributions and Ordinary Distributions on Stock

5. Treatment of Distributions Made by S Corporations

a. In General

b. Distributions by S Corporations with No Post-1913 Accumulated Earnings and Profits

c. Distributions by an S Corporation with Post-1913 Accumulated Earnings and Profits

6. Distributions Made by Foreign Corporations

7. Distributions That Are Not Dividends for State Law Purposes

8. High Yield Discount Obligations

III. Accounting for Dividends

A. In General

B. Determining Tax Status of Distribution

1. Alternatives

2. Generally Applied Rule - Date of Actual or Constructive Distribution

3. Alternative Rules

a. Declaration Date

b. Record Date

c. Date of Receipt

C. Including Distribution in Gross Income of Distributee

1. Generally

2. Constructive Receipt

3. Special Rule - Consolidated Returns

D. Gifts, Sales, or Other Assignments of Dividends or Stock

1. Gifts

2. Sales and Other Assignments

3. Waivers of Dividends

a. Bona Fide Business Purpose

b. Control Over Corporate Distributions

c. IRS Ruling Position

d. Waiver vs. Exchange of Dividend Right for Consideration

IV. Types of Dividends

A. In General

B. Section 305

C. Distributions In Kind

D. Tracking Stock

E. Stapled Stock

F. Constructive Dividends

1. In General

a. Constructive Dividend vs. Loan

(1) Loans to Shareholders

(2) Loans to Corporations

b. Transactions Characterized as Sale of Property Between Shareholder and Corporation

(1) Transactions Characterized as Sale of Property by Shareholder to Corporation

(2) Transactions Characterized as Sale of Property by Corporation to Shareholder

(3) Determining the Fair Market Value of Property

c. Payment of Shareholder's Obligations by Corporation

d. Payments by Corporation to Shareholder Characterized as Rent

e. Payments by Corporation to Shareholder Characterized as Guarantor's Fees

f. Payment by Corporation of Shareholder's Personal Expenses

g. Other Transactions

h. Payment by Corporation to Shareholder Characterized as Compensation

2. Transactions Between Affiliated Corporations Resulting in Constructive Dividends to Common Shareholders

a. In General

b. The Objective and Subjective Tests: Sammons v. Comr.

c. Types of Intercompany Transactions Resulting in Constructive Dividends

(1) Transactions Characterized as Sales of Property Between Affiliated Corporations

(2) Transactions Characterized as Intercompany Loans

(3) Transactions Characterized as Loans to Shareholder

(4) Allocations of Consolidated Tax Liability

(5) Transfers Characterized as Rent Payments

(6) Transfers Characterized as Payments for Services

V. Tax Treatment for Noncorporate Shareholders

A. Taxability of Distribution to Shareholder

1. In General

2. Qualified Dividend Income

B. Basis to Distributee

C. Holding Period of Property Distributed

VI. Dividends Received Deduction

A. Generally

B. Levels of DRD

C. Restrictions on the DRD

1. Generally

2. Aggregate DRD Limitations

3. DRD Holding Period Rules

4. Suspended Holding Periods

5. Regulations Regarding Suspension of Holding Periods

a. General

b. Basic Definitions

c. Substantial Overlap in Portfolio Stock

(1) Index Positions Representing the Values of 20 or More Stocks

(2) Index Positions Representing Less Than 20 Stocks

d. Anti-Abuse Rule

e. Options, Stacking Rule, Guarantees, and Hedges

f. Use of Related Persons or Pass-Through Entities

g. Notional Principal Contracts

D. Foreign Corporations

1. General

2. Exceptions

E. Debt-Financed Portfolio Stock Limitation

1. General

2. Definitions

a. Portfolio Stock

b. Base Period

c. Portfolio Indebtedness

d. Average Indebtedness Percentage

e. Limit on Reduction

VII. Basis Reduction for Extraordinary Dividends Received by Corporate Shareholders - § 1059

A. General

B. Basis Reduction and Gain Recognition

1. Nontaxed Portion of Dividend

2. Timing

3. Holding Period

4. Exception

C. Extraordinary Dividends

1. Definition

2. Aggregation Rules

a. 85-Day Rule

b. 365-Day Rule

3. Adjusted Basis

D. Overall Exception for Affiliated Groups

E. Special Rules

1. Certain Redemptions

2. Qualified Preferred Dividends

a. Actual Rate of Return

b. Stated Rate of Return

c. Extraordinary Portion

3. Disqualified Preferred Stock ("Self-Liquidating" Stock)

VIII. Taxation of Distributing Corporation

A. Background

B. General

1. Gains

a. Generally

b. Exclusions

2. Losses

IX. Dividends - Members of a Consolidated Group

A. General

B. Tax Consequences to Distributing Corporation

C. Tax Consequences to Distributee Corporation

D. Adjustment to Stock Basis

E. Examples

X. Dividends Related to Stock Sales

A. General

1. Effect on Purchaser

2. Effect on Individual Seller

3. Effect on Corporate Seller

B. Judicial and Administrative Authorities - Shareholder Is an Individual

1. Who Is the Beneficial Owner of the Stock?

2. Integrated Plan

3. Rev. Rul. 75-493

4. Conclusion

C. Judicial and Administrative Authorities - Shareholder Is a Corporation

1. Who Is the Beneficial Owner of the Stock?

2. Integrated Plan

3. Sham

4. Conclusion

5. Consolidated Return Regulations

XI. Reporting and Withholding

A. Reporting Requirements

B. Backup Withholding Requirements


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Publication 550, Investment Income and Expenses (Excerpt - Dividends and Other Corporate Distributions)

Worksheet 2 Publication 542, Corporations (Excerpt - Dividends-Received Deduction)

Worksheet 3 Rev. Proc. 67-14, 1967-1 C.B. 591

Worksheet 4 Form of Directors' Resolution Declaring a Cash Dividend Out of Surplus (Out of Net Profits)

Worksheet 5 Excerpts from Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 1997 (JCS-23-97) (12/18/97) Relating to Extraordinary Dividends and the Modification of the Holding Period for the Dividends-Received Deduction

Bibliography

OFFICIAL

Statutes:

Regulations:

Legislative Materials:

Treasury Rulings:

Cases:

UNOFFICIAL

Books and Treatises:

Periodicals:

1980

1983

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2003

2004

2005