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FEDERAL INCOME TAX STATUTE 1 (AGENDA FOR DISCUSSION OF TENTATIVE DRAFTS 6-7, May 1952)

handle is hein.ali/aliftp0278 and id is 1 raw text is: AMERICAN LAW INSTITUTE
INCOME TAX PROJECT
AGENDA FOR DISCUSSION
TENTATIVE DRAFTS NOS. 6 AND 7
MAY, 1952
CORPORATIONS AND SHAREHOLDERS
TENTATIVE DRAFT No. 7
L Corporate Distributions
Sections X505 through X540 provide the statutory pattern for
x treatment, of .distributions by a -corporation to its -shareholders,
tating the rules which determine whether the distribution results
a dividend taxable at ordinary surtax rates, in a capital gain or
-, or in a nonrecognition transaction. There have been no sig-
iificant changes since the last Annual Meeting in the material under
:I) and (2), below. The material in (3) is new and that in (4)
been materially changed.
1 1. The Basic Pattern.-Section X505, the basic section, provides
-t all distributions are dividend distributions unless the contrary is
specifically provided in named sections. Section X506 provides that
dividend distributions are dividends (which are taxed as ordinary
income) to the extent of current or accumulated earnings and profits.
,'Any excess of a dividend distribution over earnings and profits will
ieduce the recipient's basis of the stock in respect of which the dis-
itibution was made.
, 2. Distributions Which Are Not Dividend Distributions.-Sec-
fion X505 lists the following kinds of distributions which are not
treated as dividend distributions:
- A. Stock Dividends on Common Stock.-Distributions of any
.kind of stock on common stock are not dividend distributions. Sec-
- tion X510. However, if the stock dividend is. preferred stock, then
.under section. X519 a subsequent redemption of this stock, either by
-,the --shareholder --or- by --prearranged plan through a donee, will be
.itreated as a dividend distribution. Likewise, a sale of the preferred
'rstock will be treated as a dividend distribution. This dividend dis-
2 tribution treatment will not be accorded on redemption or sale, how-
,ever, if the shareholder has less than one per cent of the corporation's
participating stock, or, if he has more, has disposed of specified
,portions of it before the sale or redemption of the preferred stock (pro-
;Viding he has not, pursuant to plan, disposed of the participating stock
to specified relatives, controlled corporations, etc., listed in section
.X533).

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