26 USC 1059 - Corporate shareholder’s basis in stock reduced by nontaxed portion of extraordinary dividends

U.S Code last checked for updates: Apr 27, 2024

§ 1059.

Corporate shareholder’s basis in stock reduced by nontaxed portion of extraordinary dividends

(a)

General rule

If any corporation receives any extraordinary dividend with respect to any share of stock and such corporation has not held such stock for more than 2 years before the dividend announcement date—

(1)

Reduction in basis

(2)

Amounts in excess of basis

(b)

Nontaxed portion

For purposes of this section—

(1)

In general

The nontaxed portion of any dividend is the excess (if any) of—

(A)

the amount of such dividend, over

(B)

the taxable portion of such dividend.

(2)

Taxable portion

The taxable portion of any dividend is—

(A)

the portion of such dividend includible in gross income, reduced by

(B)

the amount of any deduction allowable with respect to such dividend under section 243 1

 So in original. Probably should be followed by a comma.

245, or 245A.

(c)

Extraordinary dividend defined

For purposes of this section—

(1)

In general

(2)

Threshold percentage

The term “threshold percentage” means—

(A)

5 percent in the case of stock which is preferred as to dividends, and

(B)

10 percent in the case of any other stock.

(3)

Aggregation of dividends

(A)

Aggregation within 85-day period

All dividends—

(i)

which are received by the taxpayer (or a person described in subparagraph (C)) with respect to any share of stock, and

(ii)

which have ex-dividend dates within the same period of 85 consecutive days,

shall be treated as 1 dividend.

(B)

Aggregation within 1 year where dividends exceed 20 percent of adjusted basis

All dividends—

(i)

which are received by the taxpayer (or a person described in subparagraph (C)) with respect to any share of stock, and

(ii)

which have ex-dividend dates during the same period of 365 consecutive days,

shall be treated as extraordinary dividends if the aggregate of such dividends exceeds 20 percent of the taxpayer’s adjusted basis in such stock (determined without regard to this section).

(C)

Substituted basis transactions

In the case of any stock, a person is described in this subparagraph if—

(i)

the basis of such stock in the hands of such person is determined in whole or in part by reference to the basis of such stock in the hands of the taxpayer, or

(ii)

the basis of such stock in the hands of the taxpayer is determined in whole or in part by reference to the basis of such stock in the hands of such person.

(4)

Fair market value determination

(d)

Special rules

For purposes of this section—

(1)

Time for reduction

(2)

Distributions in kind

(3)

Determination of holding period

(4)

Ex-dividend date

(5)

Dividend announcement date

(6)

Exception where stock held during entire existence of corporation

(A)

In general

Subsection (a) shall not apply to any extraordinary dividend with respect to any share of stock of a corporation if—

(i)

such stock was held by the taxpayer during the entire period such corporation was in existence, and

(ii)

except as provided in regulations, no earnings and profits of such corporation were attributable to transfers of property from (or earnings and profits of) a corporation which is not a qualified corporation.

(B)

Qualified corporation

For purposes of subparagraph (A), the term “qualified corporation” means any corporation (including a predecessor corporation)—

(i)

with respect to which the taxpayer holds directly or indirectly during the entire period of such corporation’s existence at least the same ownership interest as the taxpayer holds in the corporation distributing the extraordinary dividend, and

(ii)

which has no earnings and profits—

(I)

which were earned by, or

(II)

which are attributable to gain on property which accrued during a period the corporation holding the property was,

a corporation not described in clause (i).

(C)

Application of paragraph

(e)

Special rules for certain distributions

(1)

Treatment of partial liquidations and certain redemptions

Except as otherwise provided in regulations—

(A)

Redemptions

In the case of any redemption of stock—

(i)

which is part of a partial liquidation (within the meaning of section 302(e)) of the redeeming corporation,

(ii)

which is not pro rata as to all shareholders, or

(iii)

which would not have been treated (in whole or in part) as a dividend if—

(I)

any options had not been taken into account under section 318(a)(4), or

(II)

section 304(a) had not applied,

any amount treated as a dividend with respect to such redemption shall be treated as an extraordinary dividend to which paragraphs (1) and (2) of subsection (a) apply without regard to the period the taxpayer held such stock. In the case of a redemption described in clause (iii), only the basis in the stock redeemed shall be taken into account under subsection (a).

(B)

Reorganizations, etc.

(2)

Qualifying dividends

(A)

In general

(B)

Exception

Subparagraph (A) shall not apply to any portion of a dividend which is attributable to earnings and profits which—

(i)

were earned by a corporation during a period it was not a member of the affiliated group, or

(ii)

are attributable to gain on property which accrued during a period the corporation holding the property was not a member of the affiliated group.

(3)

Qualified preferred dividends

(A)

In general

In the case of 1 or more qualified preferred dividends with respect to any share of stock—

(i)

this section shall not apply to such dividends if the taxpayer holds such stock for more than 5 years, and

(ii)

if the taxpayer disposes of such stock before it has been held for more than 5 years, the aggregate reduction under subsection (a)(1) with respect to such dividends shall not be greater than the excess (if any) of—

(I)

the qualified preferred dividends paid with respect to such stock during the period the taxpayer held such stock, over

(II)

the qualified preferred dividends which would have been paid during such period on the basis of the stated rate of return.

(B)

Rate of return

For purposes of this paragraph—

(i)

Actual rate of return

The actual rate of return shall be the rate of return for the period for which the taxpayer held the stock, determined—

(I)

by only taking into account dividends during such period, and

(II)

by using the lesser of the adjusted basis of the taxpayer in such stock or the liquidation preference of such stock.

(ii)

Stated rate of return

(C)

Definitions and special rules

For purposes of this paragraph—

(i)

Qualified preferred dividend

The term “qualified preferred dividend” means any fixed dividend payable with respect to any share of stock which—

(I)

provides for fixed preferred dividends payable not less frequently than annually, and

(II)

is not in arrears as to dividends at the time the taxpayer acquires the stock.

Such term shall not include any dividend payable with respect to any share of stock if the actual rate of return on such stock exceeds 15 percent.

(ii)

Holding period

(f)

Treatment of dividends on certain preferred stock

(1)

In general

(2)

Disqualified preferred stock

For purposes of this subsection, the term “disqualified preferred stock” means any stock which is preferred as to dividends if—

(A)

when issued, such stock has a dividend rate which declines (or can reasonably be expected to decline) in the future,

(B)

the issue price of such stock exceeds its liquidation rights or its stated redemption price, or

(C)

such stock is otherwise structured—

(i)

to avoid the other provisions of this section, and

(ii)

to enable corporate shareholders to reduce tax through a combination of dividend received deductions and loss on the disposition of the stock.

(g)

Regulations

The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations—

(1)

providing for the application of this section in the case of stock dividends, stock splits, reorganizations, and other similar transactions, in the case of stock held by pass-thru entities, and in the case of consolidated groups, and

(2)

providing that the rules of subsection (f) shall apply in the case of stock which is not preferred as to dividends in cases where stock is structured to avoid the purposes of this section.

(Added Pub. L. 98–369, div. A, title I, § 53(a), July 18, 1984, 98 Stat. 565; amended Pub. L. 99–514, title VI, § 614(a)–(e), Oct. 22, 1986, 100 Stat. 2251–2253; Pub. L. 100–647, title I, § 1006(c), Nov. 10, 1988, 102 Stat. 3393; Pub. L. 101–239, title VII, § 7206(a), Dec. 19, 1989, 103 Stat. 2336; Pub. L. 105–34, title X, §§ 1011(a)–(c), 1013(b), title XVI, § 1604(d)(1), Aug. 5, 1997, 111 Stat. 912, 913, 918, 1098; Pub. L. 105–206, title VI, § 6010(b), July 22, 1998, 112 Stat. 813; Pub. L. 113–295, div. A, title II, § 221(a)(41)(G), Dec. 19, 2014, 128 Stat. 4044; Pub. L. 115–97, title I, § 14101(c)(2), Dec. 22, 2017, 131 Stat. 2191; Pub. L. 115–141, div. U, title IV, § 401(a)(169), Mar. 23, 2018, 132 Stat. 1192.)

cite as: 26 USC 1059