Dividends are distributions of corporate earnings and can be paid on both common and preferred stock.  There are two types of dividends: ordinary dividends and qualified dividends.  The most common types of corporate distributions are ordinary dividends, capital gain distributions, and non dividend distributions.  It is to be noted that stock dividend distributions, liquidating distributions, reorganization exchanges, and corporate distribution are treated as:

• the portion of a distribution that is a dividend is included in gross income[i];
• the portion of a distribution that is not a dividend is applied and reduces against the stockholder’s adjusted basis in the stock[ii];
• If a portion of a distribution that is not a dividend has reduced the stockholder’s adjusted basis in his stock to zero, then any remaining excess over the adjusted basis is treated as a capital gain[iii];
• That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of an increase in value accrued before the date prescribed by the statute, will be exempted from tax[iv].

If any distribution made by a corporation to its shareholders is not out of an increase in value of property accrued before the specified date and is not a dividend, then the amount of such a distribution will be applied against and reduce the adjusted basis of the stock.  If there is any excess of such basis, such excess will be taxable in the same manner as a gain from the sale or exchange of property[v].

[i] 26 USCS § 301(c)(1)

[ii] 26 USCS § 301(c)(2)

[iii] 26 USCS § 301(c)(3)

[iv] Id

[v] Koshland v. Commissioner, 1943 Tax Ct. Memo LEXIS 65 (T.C. 1943)