Dividends are payments made by a corporation to its shareholder members.  It is the portion of corporate profits paid out to stockholders.  In other words, a dividend is a distribution by a corporation of property to one or more of its shareholders assuming there are available earnings and profits[i].

Dividends are given as cash dividend, stock dividend, or other property.  Cash dividends are the most common method of sharing the profit of a company.  A portion of the company’s profits is paid to shareholders on a per share basis.  However cash dividends are subject to double taxation.  Whereas, stock dividends are dividends given in the form of additional shares of the same company according to the proportion of the shares owned.  Property dividends are paid out in the form of products or services provided by the corporation.

The following stock dividends are taxable[ii]:

• A distribution in which any shareholder has the option to take cash or other property instead of stock in the distributing corporation;
• A disproportionate distribution of stock;
• 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;
• A constructive stock distribution.

Generally, dividends are considered taxable income.  Gross income includes dividends[iii].  Dividends are taxable to the person who has the right to receive them. If a dividend is paid after the stock is sold, whether the buyer or seller includes the dividend in gross income depends on when the sale took place.

However, not all distributions from a corporation to its shareholders are dividends.  If a shareholder receives a distribution of property from a corporation with respect to its stock, the portion of the distribution that is a dividend is included in the shareholder’s income.

[i] 26 USCS § 316

[ii] 26 USCS § 305

[iii] 26 USCS § 61