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Corporate Dividends and Other Nonliquidating Distributions in Cash, Property, and Obligations
Bittker, Boris
Bittker, Boris
Abstract
Under the Internal Revenue Code of 1954, the corporation is a separate taxable entity, so that corporate income is taxed to the corporation and dividends paid by the corporation are taxable to the shareholders. The framework for the taxation of corporate distributions is provided by Sections 301 (a), 301 (c), and 316 of the Code. By virtue of these provisions, a corporate distribution is a "dividend" that must be included in gross income under § 301 (c) (1) and § 61 (a) (7) if, and to the extent that, it comes out of "earnings and profits" of the corporation accumulated after February 28, 1913 or out of earnings and profits of the taxable year. Most distributions of most corporations fall well within this category of taxable "dividends" and hence are taxed as ordinary income to the shareholder, subject to the $50 exclusion of § 116 and the 4 percent dividends received credit of § 34 if the shareholder is an individual or to the 85 percent dividends received deduction of § 243 if the shareholder is a corporation. To the extent that a distribution by a corporation is not covered by current or post-1913 earnings and profits, however, it is treated by § 301(c)(2) as a return of capital to the shareholder, to be applied against and in reduction of the adjusted basis of his stock. If the distribution exceeds the adjusted basis of the stock, the excess is ordinarily taxed as capital gain, with an exception of minor importance for distributions out of increase in the value of corporate property accrued before March 1, 1913.