26 U.S.C. Subpart A: Taxation of Recipients of Corporation Distributions
This article is a second installment of our series of articles on corporate distributions. Today’s topic is the description of 26 U.S.C. Subpart A, which contains the most important tax provisions for our subsequent discussions of this subject.
26 U.S.C. Subpart A: Purpose
26 U.S.C Subpart A is the first part of Part I of Subchapter C, which deals with corporate distributions and adjustments. The main purpose of Subpart A is to establish the rules for taxation of recipients of corporate distributions. In other words, this section of the Internal Revenue Code deals with a situation where a corporation distributes or is deemed to have distributed something – a property, stocks, et cetera – to its shareholders. The focus here is not on the corporation, but on how its shareholders should be taxed.
26 U.S.C. Subpart A: §§301-307
26 U.S.C. Subpart A contains seven tax sections: IRC (Internal Revenue Code) §§301-307. All of these provisions are very important for both US domestic and international tax purposes.
IRC §301 establishes a general tax framework for corporate distributions and specifically deals with the distributions of property classified as dividends under IRC §316.
IRC §§302-304 describe the tax rules related to redemptions of stock (as defined in §317(b)), including some very specific situations. For example, §303 deals with distributions in redemption of stock to pay death taxes. The main provision, however, is §302 with its four tests which are highly important for determining whether a redemption of stock will be treated as a sale under §1001 or a corporate distribution under §301.
IRC §305 focuses on the special tax rules concerning stock dividends. It establishes the general rule that stock dividends are not taxable, but it also contains numerous exceptions to the general rule. More exceptions to the general rule may be found in §306.
IRC §306 deals with dispositions of “§306 stock” as defined in §306(c). §306 is very important to taxpayers because, with a few exceptions, it treats a disposition of §306 stock as ordinary income. This section also contains a loss non-recognition provision.
Finally, IRC §307 explains the calculation of cost-basis of stock received by shareholders as a result of a §305(a) distribution. This section has very important implications not only to stock dividends in general, but also to stock dividends made by a PFIC (Passive Foreign Investment Company). The calculation of PFIC tax and PFIC interest with respect to a disposition of such PFIC stock dividends are directly influenced by §307.
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