In a proportionate nonliquidating distribution of a capital asset

There are several reasons why the Board of Directors may declare a stock dividend: However, if a corporation allows the shareholders to choose between the stock dividend or cash, then the distribution is taxable.

If the stockholder elects to receive cash, then obviously that distribution is taxable to the shareholder.

If the shareholder elects to receive the stock dividend, then his proportionate ownership of the corporation increases at the expense of those who choose to take cash.

Therefore, the shareholders who received the stock dividend must recognize it as income equal to the FMV of the new shares, which is also equal to the tax basis in the shares.

For example, the dividends-received deduction is deductible for income tax purposes but not for the computation of E&P, since it does not reduce the amount of money available to pay dividends.When the shareholder receives the property, then the adjusted basis in the property is the property's FMV, not the corporation's basis.Sometimes, instead of cash or property, a corporation may distribute stock dividends, which represents a capitalization of retained earnings by increasing the number of outstanding shares.If the FMV is greater than the corporation's tax basis in the property, then it must recognize the distribution as a constructive sale, where the FMV minus the tax basis is equal to the corporation's profit, which is added to current E&P.However, the distribution of the property reduces E&P by the fair market value of the property.

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