Academic journal article Journal of Accountancy

IRS Seeks to Expand Extraordinary Dividend Rules

Academic journal article Journal of Accountancy

IRS Seeks to Expand Extraordinary Dividend Rules

Article excerpt

Under Internal Revenue Code section 356(a)(1), when a shareholder receives both stock and boot in a reorganization, the shareholder's gain is recognized in an amount not more than the boot's value. Under section 356(a)(2) and revenue ruling 93-61, this gain is characterized as a dividend (to the extent the company has accumulated earnings and profits) if the exchange is considered a dividend.

Corporate shareholders historically have preferred dividend treatment because of the availability of the corporate dividends-received deduction (DRD). It also was thought that reorganization boot dividends were generally immune from the extraordinary dividend rules. (Those rules require a stock-basis reduction if the dividend exceeds certain statutory thresholds.) Now, however, in proposed regulations section 1.1059(e)-1, the Internal Revenue Service characterizes a reorganization exchange as a redemption. This is significant because any dividend resulting from a redemption that is not pro rata to all shareholders is automatically an extraordinary dividend.

Observation: Corporations will have less (or no) incentive to earn reorganization boot dividends because-- as extraordinary dividends--the income will give rise to stock basis reductions measured by the DRDs when the dividends are received. …

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