Tax Analysts provides news, analysis, and commentary on tax-related topics, including the latest developments affecting tax treatment of dividends.

Dividends trigger consequences for both the payors and the recipients of the dividends. 26 U.S.C 61(a)(7) specifically lists dividends as an item to be included in gross income, and section 301 elaborates. However, what qualifies as a dividend is not always clear, and exceptions to the general rule may apply. Section 316 and the related regulations define dividends, but the issue of whether a payment is or isn’t a dividend still remains. Courts not rarely find that payments were “constructive dividends;” payments that were not declared as dividends, but nevertheless should have been treated as dividends by both the payor and the recipient.

Regulation section 1.61-9 provides that gross income includes both cash dividends and dividends in property other than cash. A distribution of stock or rights to acquire stock in the distributing corporation is generally not a dividend (section 317), but such a distribution with respect to a corporation other than the distribution corporation generally is.

Corporations paying dividends face dividend tax consequences and considerations as well, whether accounting for the dividends-paid deduction in section 561, determining eligibility under section 562, or determining whether a payment qualifies as a dividend equivalent under section 871(m) and is then treated as a dividend from U.S. sources and is subject to withholding tax when paid to a non-U.S. recipient. ("News Analysis: Why the Dividend Equivalent Regs Are Hard to Write")

Tax Analysts consistently and promptly publishes all relevant developments regarding taxation of dividends. To stay caught up on all tax-related topics, sign up for a free trial and subscribe to Tax Notes Today Federal.