Taxation of liquidating dividends

On July 15, 1954, the company had a paid-in surplus of ,000, consisting of the premium received on the preferred stock; earnings and profits of ,000 accumulated prior to March 1, 1913; and earnings and profits accumulated since February 28, 1913, of ,000.

The N Corporation, a calendar year taxpayer, is completely liquidated on July 1, 1958, pursuant to a plan of liquidation adopted February 1, 1955.

No distributions in liquidation were made pursuant to the plan of liquidation adopted February 1, 1955, until the distribution in complete liquidation on July 1, 1958.

(The Y Corporation, which makes its income tax returns on the calendar year basis, was organized on January 1, 1910, with an authorized and outstanding capital stock of 2,000 shares of common stock of a par value of $100 each and 1,000 shares of participating preferred stock of a par value of $100 each.

The preferred stock was to receive annual dividends of $7 per share and $100 per share on complete liquidation of the corporation in priority to any payments on common stock, and was to participate equally with the common stock in either instance after the common stock had received a similar amount.

If a dividend is paid in property (other than money) the amount of the dividends paid deduction with respect to such property shall be the adjusted basis of the property in the hands of the distributing corporation at the time of the distribution.

See paragraph (b)(2) of this section for special rules with respect to liquidating distributions by personal holding companies occurring during a taxable year of the distributing corporation beginning after December 31, 1963.

However, the preferred stock was redeemable in whole or in part at the option of the board of directors at any time at 6 per share plus its proportion of the earnings of the company at the time of such redemption.

In 1910 the preferred stock was issued at 6 per share, for a total of 6,000 and the common stock was issued, at 0 per share, for a total of 0,000.

The capital account, for the purposes of this subdivision, includes not only amounts representing the par or stated value of the stock with respect to which the liquidation distribution is made, but also that stock's proper share of the paid-in surplus, and such other corporate items, if any, which, for purposes of income taxation, are treated like capital in that they are not taxable dividends when distributed but are applied against and reduce the basis of the stock.

The remainder of the distribution in liquidation is, ordinarily, properly chargeable to the earnings and profits accumulated after February 28, 1913.

Also see section 563 for special rules with respect to dividends paid after the close of the taxable year.

Tags: , ,