Taxation Of Dividends

<div class="Section1">A stock split is treated in the same manner as a stock dividend.<a href="#_ftn1" name="_ftnref1">¹</a>&nbsp;Therefore, a stock split is generally a nontaxable event for the shareholder (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7509">7509</a>).&nbsp;The tax basis and holding period of the &ldquo;new&rdquo; stock received in a stock split is determined as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7510">7510</a>.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;305(a).<br /> <br /> </div></div><br />

<div class="Section1">No. Without the transfer of the underlying stock, a gift or gratuitous assignment of future dividends will not shift the taxability of the dividends away from the owner of the stock.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> The bona fide sale of future dividends for good and sufficient consideration will result in the dividends being taxed to the purchaser and not the shareholder; but this will accelerate rather than reduce the shareholder’s tax since the net sales proceeds must be reported by the shareholder-seller as ordinary income in the year of the sale.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   <em><em>See</em> Van Brunt v. Comm.</em>, 11 BTA 406 (1928); <em>Lucas v. Earl</em>, 281 U.S. 111 (1930).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   <em>Estate of Stranahan v. Comm.</em>, 472 F.2d 867 (6th Cir. 1973).<br /> <br /> </div>

<div class="Section1">A dividend paid in bonds, notes, or other obligations of the distributing corporation is treated as a dividend &ldquo;in kind&rdquo; and the obligations are treated as property received in a dividend distribution.<a href="#_ftn1" name="_ftnref1">¹</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7503">7503</a> for the taxation of dividends &ldquo;in kind.&rdquo;<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;317(a);&nbsp;Treas. Reg. &sect;&nbsp;1.317-1.<br /> <br /> </div></div><br />

<div class="Section1">A <em>stock dividend</em> is a dividend paid in shares of stock of the distributing corporation to its shareholders with respect to its outstanding stock. A distribution of stock to compensate the recipient for services rendered, for goods provided, or in payment of a debt is not made with respect to the distributing corporation’s outstanding stock and, therefore, is not a stock dividend.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> A distribution of stock warrants (or other rights to acquire stock of the distributing corporation) is treated in the same manner as a stock dividend so long as the distribution of such warrants is made with respect to the corporation’s outstanding stock (and not as compensation for services, etc.).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A distribution of stock of the distributing corporation made with respect to outstanding stock rights or convertible securities of that corporation to the owners thereof will also qualify as a stock dividend.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 305(a); Treas. Reg. § 1.305-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 305(d); Treas. Reg. § 1.305-1(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 305(d).<br /> <br /> </div>

<div class="Section1">Many dividend reinvestment plans offer participating shareholders an option to invest additional cash to purchase <em>at a discount</em> limited quantities of the distributing corporation’s stock. If a shareholder elects to do so, he must include as dividend income on his federal income tax return the difference between the fair market value of the stock on the dividend payment date and the optional payment. (Apparently, this would normally be the amount of the discount.) A shareholder’s tax basis in the shares purchased under this type of option is generally the shares’ fair market value on the dividend payment date.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> The holding period of stock purchased under the optional aspect of a dividend reinvestment plan begins on the day following the date the shares are purchased.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   Rev. Rul. 78-375, 1978-2 CB 130.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Rev. Rul. 76-53, 1976-1 CB 87.<br /> <br /> </div>

<div class="Section1">To the extent that a distribution paid with respect to its stock exceeds the corporation’s accumulated and current earnings and profits, the shareholders will be deemed to have received a “return of capital.”<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> When a shareholder receives a “return of capital” distribution, the shareholder’s tax basis in the stock is reduced (but not below zero) by the amount of the distribution. The shareholder is not taxed to the extent that basis is reduced. Any excess of “return of capital” over the shareholder’s tax basis in the stock is generally treated as capital gain.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 301(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   IRC §§ 301(c), 316.<br /> <br /> </div>

<div class="Section1">A dividend is a distribution of cash or property, made by a corporation to its shareholders out of accumulated or current earnings and profits. (Distributions are treated as coming out of earnings and profits to the extent the corporation has any.)<a href="#_ftn1" name="_ftnref1">¹</a> A dividend is a distribution made &ldquo;with respect to&rdquo; a corporation&rsquo;s common or preferred stock; that is, it is made because of stock ownership, not because of some other reason &ndash; such as compensation for services rendered or goods provided or in payment of a debt &ndash; even though it is made to a stockholder. While distribution by a company of its own stock or of stock rights is commonly called a stock dividend, it is generally not considered a dividend for tax purposes, because it is not treated as a distribution of property.<a href="#_ftn2" name="_ftnref2">²</a> (That general rule is subject to exceptions, however, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7509">7509</a>.)<div class="Section1"><br /> <br /> For a discussion of&nbsp;&ldquo;stock dividends&rdquo; and distributions of stock rights, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7508">7508</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7509">7509</a>.<br /> <br /> The amount received from a short-seller to reimburse the lender of stock in a short sale (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7524">7524</a>) for dividends paid during the loan period is not a dividend to the lender.<a href="#_ftn3" name="_ftnref3">³</a> For the treatment of such payments made to shareholders in lieu of dividends (i.e., &ldquo;substitute payments&rdquo;) under JGTRRA 2003, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;316(a);&nbsp;Treas. Reg. &sect;&nbsp;1.316-1(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;317(a);&nbsp;Treas. Reg. &sect;&nbsp;1.317-1.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Rev. Rul. 60-177, 1960-1 CB 9.<br /> <br /> </div></div><br />

<div class="Section1">A shareholder should report, <em>without itemization</em>, the total amount of dividends received on securities held in the broker’s name for the taxpayer (i.e., held in “street name”), as shown on each statement furnished by the broker on Schedule B of Form 1040.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   Rev. Rul. 64-324, 1964-2 CB 463.<br /> <br /> </div>

<div class="Section1">If a shareholder acquires stock warrants or other stock rights of the distributing corporation in a nontaxable stock dividend distribution (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7509">7509</a>) and either exercises or sells the warrants or rights, the tax basis in the &ldquo;old&rdquo; shares with respect to which the distribution of warrants or rights was made is generally reallocated (in the same manner as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7510">7510</a> for stock dividends) between the old shares and the warrants or rights, in proportion to the fair market values of each on the date of distribution (not the declaration or record date). But if the fair market value of the warrants or rights is less than 15 percent of the fair market value of the &ldquo;old&rdquo; stock, the tax basis of the warrants will automatically be zero, unless the shareholder makes an irrevocable election to reallocate the basis of the old stock with respect to which the warrants or rights were distributed to <em>all</em> warrants or other rights received in the distribution.<a href="#_ftn1" name="_ftnref1">¹</a> Despite this, it has been held that where the subscription rights became valueless and the subscriptions received were refunded, no adjustment to the shareholders&rsquo; basis was required.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> Apparently, if the warrants or rights are allowed to expire without exercise or sale, the tax basis of the warrants or rights is zero.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&sect;&nbsp;1.307-1, 1.307-2.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Rev. Rul. 74-501, 1974-2 CB 98.<br /> <br /> </div></div><br />

<div class="Section1">Although dividends received or credited under a dividend reinvestment plan will be taxed as dividend income, the specifics depend on which of the two basic types of plans is involved.<div class="Section1"><br /> <br /> (1) If, under the plan, the corporation pays the cash dividends (that would otherwise be paid to the plan participants) to an independent agent who purchases shares of the distributing corporation&rsquo;s stock in the open market and credits them to the plan accounts of the individual shareholders, each participating shareholder is treated as though the cash had been distributed directly to the shareholder in a cash dividend.<a href="#_ftn1" name="_ftnref1">¹</a>&nbsp;Thus, the total amount of the cash dividend paid on the shareholder&rsquo;s behalf to the agent must be included by the shareholder in ordinary income as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7502">7502</a>.The value of brokerage commissions paid by a corporation to an agent under a dividend reinvestment plan is a constructive dividend to each shareholder in the amount of each shareholder&rsquo;s pro rata share of the brokerage fees actually paid.<a href="#_ftn2" name="_ftnref2">²</a>&nbsp;The shares credited to a shareholder under the plan are treated as though the shareholder had made the purchase. Where the corporation does not pay the brokerage commissions to an agent purchasing the shares, commissions paid by the agent are treated as if paid by the individual shareholder (i.e., added to the shareholder&rsquo;s tax basis in the new shares), <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8049">8049</a>.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> (2) If, under the plan, the corporation (a) manages the plan itself and credits the accounts of participating shareholders with shares, or (b) pays the cash dividends to an independent agent who purchases shares (often at a discount) from the distributing corporation, each participating shareholder is treated as if the shareholder had received a <em>taxable</em> stock dividend, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7509">7509</a>. As a result, each participating shareholder must include as dividend income the fair market value (on the dividend payment date) of the shares credited to the shareholder&rsquo;s account in the plan <em>plus</em> any service charge paid to the agent (if one is used) out of the shareholder&rsquo;s portion of the cash dividend paid. Apparently, any service and administrative charges paid <em>by the corporation</em> need not be included in income by shareholders participating in the plan.<a href="#_ftn4" name="_ftnref4">⁴</a>&nbsp;The shareholder&rsquo;s tax basis in the shares credited to the shareholder&rsquo;s account is the fair market value of those shares on the dividend payment date, even though the shares may have been purchased at a discount or premium.<a href="#_ftn5" name="_ftnref5">⁵</a>&nbsp;The holding period of the shares credited to a participating shareholder&rsquo;s account begins on the day following the dividend payment date.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> If a service charge is paid to an independent agent out of the cash dividend under either type of plan, that service charge may be deductible by the participating shareholder.<a href="#_ftn7" name="_ftnref7">⁷</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8049">8049</a> regarding the deduction of expenses paid in connection with the production of investment<br /> income.<br /> <br /> A participating shareholder realizes no taxable income when the certificates are eventually received representing whole shares credited to the shareholder&rsquo;s account in the plan.<a href="#_ftn8" name="_ftnref8">⁸</a> Upon withdrawal from or termination of the plan, if cash is distributed to a participating shareholder in lieu of fractional share interests, the shareholder is treated as though fractional shares had been received and redeemed, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7512">7512</a>.<a href="#_ftn9" name="_ftnref9">⁹</a> If on withdrawal from or termination of the plan, fractional shares and/or whole shares are sold or exchanged on behalf of the participating shareholders, each shareholder recognizes capital gain or loss as though the shareholder had received and sold the shares.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Rev. Rul. 77-149, 1977-1 CB 82.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; GCM 39482 (5-5-86).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Rev. Rul. 75-548, 1975-2 CB 331; Rev. Rul. 70-627, 1970-2 CB 159.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Let. Rul. 7928066.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Rev. Rul. 79-42, 1979-1 CB 130; Rev. Rul. 78-375, 1978-2 CB 130; Rev. Rul. 76-53, 1976-1 CB 87.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Rev. Rul. 76-53, 1976-1 CB 87; Rev. Rul. 77-149, 1977-1 CB 82.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Rev. Rul. 78-375, 1978-2 CB 130; Rev. Rul. 70-627, 1970-2 CB 159.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Rev. Rul. 76-53, 1976-1 CB 87; Rev. Rul. 78-375, 1978-2 CB 130.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Rev. Rul. 78-375, 1978-2 CB 130; Rev. Rul. 76-53, 1976-1 CB 87.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Rev. Rul. 78-375, 1978-2 CB 130.<br /> <br /> </div></div><br />