The term dividend means any distribution of property made by a corporation to its shareholders out of its earnings and profits of the taxable year, without regard to the amount of the earnings and profits at the time the distribution was made[i].
Dividends are taxable income. But not all distributions from a corporation to its shareholders are dividends. For taxation, of corporate distributions that portion of the distribution which is a dividend is included in gross income[ii]. Gross income means all income from whatever source derived[iii]. Pursuant to 26 USCS § 61, gross income includes dividend.
Corporate earnings may constitute a dividend even if the formalities of a dividend declaration are not observed, the distribution is not recorded on the corporate books as such, it is not in proportion to stockholdings, or even that some of the stockholders do not participate in its benefits[iv].
Pursuant to 26 USCS § 301, the amount of dividend is the sum of the amount of money received and the fair market value (FMV) of the other property received, reduced (but not below zero) by (a) the amount of any liability of the corporation assumed by the shareholder in connection with the dividend distribution, and by (b) the amount of any liability to which the property distributed is subject.
When a shareholder receives a distribution of property from a corporation with respect to its stock, the portion of the distribution that’s a dividend is included in the shareholder’s income.
Dividends are taxable to the person who has the right to receive them. If a dividend is paid after stock is sold, whether the buyer or seller includes the dividend in gross income depends on when the sale took place.
A shareholder generally is taxed on a dividend in the year it is unqualifiedly made subject to his demand. Thus, dividends are taxable income for the year received or unqualifiedly made subject to the shareholder’s demand.
[i] 26 USCS § 316 (a)
[ii] 26 USCS § 301
[iii] 26 USCS § 61
[iv] Paramount-Richards Theatres, Inc. v. Commissioner, 153 F.2d 602 (5th Cir. La. 1946)