Abstract

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Corporate Distributions and the Income Tax: A Consideration of the Inconsistency between Subchapter C and Its Underlying Policy


Charles R.T. O'Kelley


Adolf A. Berle, Jr. Center on Corporations, Law and Society, Seattle University School of Law

January 1, 1981

Vanderbilt Law Review, Vol. 34, No. 1, pp. 1-35, January 1981

Abstract:     
The issue of whether the sale of shares to an issuer shall be treated as a dividend or as received in exchange for a capital asset has troubled Congress, courts, and commentators since the Revenue Act of 1913. If a corporation redeems some of its shares or distributes all of its assets in complete liquidation, the transaction is generally described as having the characteristics of a divided to the extent the distribution is ‘out of earnings and profits' and the characteristics of a sale to the extent that it terminates the equity interest of the redeemed party. In light of the existence of equally compelling analogies, each suggesting the opposite treatment, it has been suggested that in determining the appropriate treatment of distribution in complete liquidation or redemption, analogizing the transaction to a sale or a dividend is of limited value.

A critical error permeates this analysis. The assumption is made that to the extent that a corporate distribution is ‘out of earnings and profits,’ the distribution is analogous to a dividend. This assumption leads proponents of reform to suggest dividend treatment, or its equivalent, for distributions in redemption of some or all of a corporation's shares. Meaningful suggestions for reform must, however, begin with an understanding of when a distribution is, or is not, analogous to a dividend under the present system - that is, with an understanding of how one must define a dividend to comport with the fundaments of the present system.

This Article suggests that although one part of a corporate distribution may be analogous to a sale and the remainder to a dividend, there is no overlap of, or competition between, analogies. This lack of overlap is apparent when one realizes that a dividend and a sale are methods of realizing different types of gain, rather than alternative methods of realizing the same type of gain. This Article examines the basic conceptual model underlying the present system of taxing corporate distributions, describes the appropriate treatment of corporate distributions that is suggested by an understanding of the underlying concepts, and indicates the discrepancies between the present Code and this model.

Number of Pages in PDF File: 37

Keywords: Subchapter C, tax policy, capital gains, ordinary income, redemption, partial liquidation, tax policy, income tax, Chirelstein, corporate separations, reincorporation bailout, corporate separations, spin-offs, split-offs, income tax history

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Date posted: March 25, 2010 ; Last revised: April 18, 2010

Suggested Citation

O'Kelley, Charles R.T., Corporate Distributions and the Income Tax: A Consideration of the Inconsistency between Subchapter C and Its Underlying Policy (January 1, 1981). Vanderbilt Law Review, Vol. 34, No. 1, pp. 1-35, January 1981. Available at SSRN: http://ssrn.com/abstract=1571816

Contact Information

Charles R.T. O'Kelley (Contact Author)
Adolf A. Berle, Jr. Center on Corporations, Law and Society, Seattle University School of Law ( email )
901 12th Avenue, Sullivan Hall
P.O. Box 222000
Seattle, WA n/a 98122-1090
United States
206 398 4252 (Phone)
206 398 4077 (Fax)
HOME PAGE: http://www.law.seattleu.edu/x1865.xml

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