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Determining the Amount of a Dividend

Pursuant to 26 USCS § 301, the amount of a 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.  FMV is determined as of the date of distribution, which may or may not be the date of actual receipt by the shareholder.

If a subsidiary corporation distributes parent indebtedness to the parent corporation in a taxable year in which the subsidiary corporation’s earnings and profits are greater than or equal to the fair market value of the distributed indebtedness, the parent corporation is treated as receiving a dividend equal to the debt’s FMV on the date of distribution date.  The parent corporation  may realize discharge of indebtedness income or be entitled to an interest deduction depending on the fair market value of the indebtedness on the date of the distribution relative to its adjusted issue price[i].

[i] Rev. Rul. 2004-79 (I.R.S. 2004)

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