Distribution of Stock and Section 306 Stock

Abstract:     
The contributed material consists of a chapter on stock dividends and preferred stock bailouts from the Concise Hornbook, Principles of Corporate Taxation (2010). The material explains what is meant by a “stock dividend”and explores the historical tax treatment of those dividends as well as the current treatment. The chapter notes how alternative devices might be used to accomplish consequences that are effectively the same as those that flow from a stock dividend and how the tax laws deal with those equivalent transactions. The several exceptions to exclusion from income are described and illustrated by the use of examples. The rules regarding the determination of the basis of both the old and new stock are examined. The previous use of preferred stock to bail out a corporation’s earnings is demonstrated, and the current rules to prevent the abusive use of so-called “preferred stock bailouts” are examined and illustrated.

Number of Pages in PDF File: 25

Keywords: Stock Dividend, Preferred Stock, Bailout, 306

JEL Classification: H20, H25

working papers series