The taxable stock dividends or rights include:
- A distribution in which any shareholder has the option to take cash or other property instead of stock rights in the distributing corporation, pursuant to I.R.C. Sec. 305(b)(1);
- Disproportionate distribution of stock or rights, pursuant to I.R.C. Sec. 305(b)(2);
- A distribution of stock which results in the receipt of preferred stock by some common shareholders and the receipt of common stock by other common shareholders, pursuant to I.R.C. Sec. 305(b)(3);
- Any distributions of stock in respect of preferred stock, other than an increase in the conversion ratio of convertible preferred made solely to take into account a stock dividend or stock split with respect to the stock into which the convertible preferred stock is convertible, pursuant to I.R.C. Sec. 305(b)(4);
- Any distribution of convertible preferred stock unless IRS can be satisfied it won’t have the result in (2) above, pursuant to I.R.C. Sec. 305(b)(5); or
- A constructive stock distribution, pursuant to I.R.C. Sec. 305(c)
Treas. Reg. § 1.305-1(b) provides that a stock or rights dividend is taxable because one or more shareholders can elect cash and all shareholders who receive cash are taxed on the amount received. Those who receive stock or rights are taxed on the fair market value of the stock or rights on the date of distribution.