A distribution of stock may be required for the payment of a stock dividend. A stock dividend does not involve cash, but a distribution of shares of the corporation’s stock. A distribution of stock dividend is for giving something to its stockholders, where the corporation does not feel to part with its cash. Planning for any stock distribution should include the following steps:
- Direct registration
- Certificate Inventory
- Opinion Letter and Adequate Authorized Shares
- Restricted Shares
- Delivery of Shares
- Board Resolution Declaring the Distribution
- Record Dates, Notify Exchange, and Ex Dates
- Stock Distribution Rates
- Fractional Shares and Cash-in-Lieu
- Tax Reporting
- Dividend Reinvestment Plans
Pursuant to 26 USCS § 311, no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of its stock (or rights to acquire its stock), or property. Therefore, it shall not be taxable to the shareholders.
There can be two type of stock dividends. Small stock dividend occurs when the new shares being issued are less than 20-25 percent of the total number of shares outstanding prior to the stock dividend. On the other hand, a large stock dividend occurs when the new shares issued are more than 20-25 percent of the total value of shares outstanding prior to the stock dividend.