Liqudating dividends
Corporate shareholders may prefer that the distribution be treated as a dividend, allowing the corporation to take advantage of the special dividends-received deduction under Code § 243 (which allows the dividends to only be taxed once at the corporate level).
On the other hand, individual shareholders often prefer that the distribution be treated as a redemption, for three reasons: A distribution qualifies as a stock redemption only if it significantly reduces the interest of the shareholder in the corporation.
A corporation will not recognize any gain or loss on a distribution of cash to its shareholders.[13] But if the corporation distributes appreciated property, the corporation must recognize gain as if the property were sold to the shareholder at fair market value.[14] Important Note: These two rules operate as a loss disallowance system.
If the corporation distributes appreciated property, the corporation is taxed on the gain under Code § 311(b).
Most frequently, companies pay cash dividends, which are direct cash payments in accordance to how many shares a shareholder owns.
But that section only covers gain on distributions of appreciated property.
If the corporation distributes property that has depreciated (i.e., property with a built-in loss), Code § 311(b) does not apply.
A dividend is classified as a stock dividend when a company issues stock to shareholders as a form of compensation.
For accounting purposes, when a company issues less than 25% of its outstanding shares, the transaction is considered to be a stock dividend.
