Taxation of liquidating dividends
The capital account, for the purposes of this subdivision, includes not only amounts representing the par or stated value of the stock with respect to which the liquidation distribution is made, but also that stock's proper share of the paid-in surplus, and such other corporate items, if any, which, for purposes of income taxation, are treated like capital in that they are not taxable dividends when distributed but are applied against and reduce the basis of the stock.The remainder of the distribution in liquidation is, ordinarily, properly chargeable to the earnings and profits accumulated after February 28, 1913.In order to qualify under that exception, the distribution must be one either in complete or partial liquidation of a corporation pursuant to sections 331, 332, or 333.See subparagraph (2) of this paragraph for rules relating to the treatment of distributions in complete liquidation made by a corporation which is a personal holding company to corporate shareholders during a taxable year of such distributing corporation beginning after December 31, 1963.During the period January 1, 1955, to the date of liquidation, November 1, 1955, it has earnings and profits of ,000. The M Corporation is entitled to a dividends paid deduction in the amount of ,000 as a result of its distribution in complete liquidation on November 1, 1955. 2221]§ 904 - Limitation on credit§ 907 - Special rules in case of foreign oil and gas income§ 911 - Citizens or residents of the United States living abroad§ 924§ 925§ 927§ 934 - Limitation on reduction in income tax liability incurred to the Virgin Islands§ 936 - Puerto Rico and possession tax credit§ 937 - Residence and source rules involving possessions§ 954 - Foreign base company income§ 956 - Investment of earnings in United States property§ 957 - Controlled foreign corporations; United States persons§ 960 - Deemed paid credit for subpart F inclusions§ 963 - Repealed. The M Corporation, a calendar year taxpayer, is completely liquidated on November 1, 1955, pursuant to a plan of liquidation adopted April 1, 1955. 58]§ 985 - Functional currency§ 987 - Branch transactions§ 988 - Treatment of certain foreign currency transactions§ 989 - Other definitions and special rules§ 1017 - Discharge of indebtedness§ 1032 - Exchange of stock for property§ 1059 - Corporate shareholder’s basis in stock reduced by nontaxed portion of extraordinary dividends§ 1060 - Special allocation rules for certain asset acquisitions§ 1092 - Straddles§ 1202 - Partial exclusion for gain from certain small business stock§ 1221 - Capital asset defined§ 1244 - Losses on small business stock§ 1248 - Gain from certain sales or exchanges of stock in certain foreign corporations§ 1254 - Gain from disposition of interest in oil, gas, geothermal, or other mineral properties§ 1275 - Other definitions and special rules§ 1286 - Tax treatment of stripped bonds§ 1291 - Interest on tax deferral§ 1293 - Current taxation of income from qualified electing funds§ 1294 - Election to extend time for payment of tax on undistributed earnings§ 1295 - Qualified electing fund§ 1296 - Election of mark to market for marketable stock§ 1297 - Passive foreign investment company§ 1298 - Special rules§ 1301 - Averaging of farm income§ 1361 - S corporation defined§ 1368 - Distributions§ 1374 - Tax imposed on certain built-in gains§ 1377 - Definitions and special rule§ 1378 - Taxable year of S corporation§ 1397D - Qualified zone property defined§ 1397E - Repealed.
Further, for purposes of the dividends paid deduction, the term does not include a distribution in liquidation unless the distribution is treated as a dividend under section 316(b)(2) and paragraph (b)(2) of § 1.316-1, or under section 333(e)(1) and paragraph (c) of § 1.333-4 or paragraph (c)(2), (d)(1)(ii), or (d)(2) of § 1.333-5, or qualifies under section 562(b) and paragraph (b) of this section.On January 1, 1958, N Corporation had a deficit in earnings and profits of ,000. 610]§ 817A - Special rules for modified guaranteed contracts§ 832 - Insurance company taxable income§ 845 - Certain reinsurance agreements§ 846 - Discounted unpaid losses defined§ 848 - Capitalization of certain policy acquisition expenses§ 852 - Taxation of regulated investment companies and their shareholders§ 860E - Treatment of income in excess of daily accruals on residual interests§ 860G - Other definitions and special rules§ 863 - Special rules for determining source§ 864 - Definitions and special rules§ 865 - Source rules for personal property sales§ 874 - Allowance of deductions and credits§ 882 - Tax on income of foreign corporations connected with United States business§ 883 - Exclusions from gross income§ 884 - Branch profits tax§ 892 - Income of foreign governments and of international organizations§ 894 - Income affected by treaty§ 897 - Disposition of investment in United States real property§ 901 - Taxes of foreign countries and of possessions of United States§ 902 - Repealed. During the period January 1, 1958, to the date of liquidation, July 1, 1958, the N Corporation has earnings and profits of ,000. Thus, if there is a deficit in earnings and profits on the first day of a taxable year, and the earnings and profits for such taxable year do not exceed such deficit, no dividends paid deduction would be allowed for such taxable year with respect to a distribution in liquidation; if the earnings and profits for such taxable year exceed the deficit in earnings and profits which existed on the first day of such taxable year, then a dividends paid deduction would be allowed to the extent of such excess.