§565 — Title 26 Internal Revenue Code | U.S. Code

Summary

A corporation can get its dividends-paid deduction without actually sending cash, if its shareholders agree. A shareholder who owns consent stock on the last day of the corporation's tax year can file a consent agreeing to treat a stated amount as a dividend. That amount is then treated as if the corporation paid it to the shareholder in money on the last day of the year, and the shareholder immediately contributed it back to the company as capital. The shareholder reports the dividend income even though no money changed hands. This does not work for amounts that would be preferential dividends or that would not count as real dividends if paid in cash. If the shareholder is a nonresident alien or foreign corporation, the consent must come with money to cover the withholding tax that a cash dividend would have required. Consent stock means the class of stock that shares in whatever earnings remain after preferred dividends, in the same proportion no matter the size of the distribution.

Title 26, §565

Internal Revenue Code — Source: USLM XML via OLRC

(a)If any person owns consent stock (as defined in subsection (f)(1)) in a corporation on the last day of the taxable year of such corporation, and such person agrees, in a consent filed with the return of such corporation in accordance with regulations prescribed by the Secretary, to treat as a dividend the amount specified in such consent, the amount so specified shall, except as provided in subsection (b), constitute a consent dividend for purposes of section 561 (relating to the deduction for dividends paid).

(b)A consent dividend shall not include—

(1)an amount specified in a consent which, if distributed in money, would constitute, or be part of, a distribution which would be disqualified for purposes of the dividends paid deduction under section 562(c) (relating to preferential dividends), or

(2)an amount specified in a consent which would not constitute a dividend (as defined in section 316) if the total amounts specified in consents filed by the corporation had been distributed in money to shareholders on the last day of the taxable year of such corporation.

(c)The amount of a consent dividend shall be considered, for purposes of this title—

(1)as distributed in money by the corporation to the shareholder on the last day of the taxable year of the corporation, and

(2)as contributed to the capital of the corporation by the shareholder on such day.

(d)If a distribution by a corporation consists in part of consent dividends and in part of money or other property, the entire amount specified in the consents and the amount of such money or other property shall be considered together for purposes of applying this title.

(e)In the case of a consent dividend which, if paid in money would be subject to the provisions of section 1441 (relating to withholding of tax on nonresident aliens) or section 1442 (relating to withholding of tax on foreign corporations), this section shall not apply unless the consent is accompanied by money, or such other medium of payment as the Secretary may by regulations authorize, in an amount equal to the amount that would be required to be deducted and withheld under section 1441 or 1442 if the consent dividend had been, on the last day of the taxable year of the corporation, paid to the shareholder in money as a dividend. The amount accompanying the consent shall be credited against the tax imposed by this subtitle on the shareholder.

(f)(1)Consent stock, for purposes of this section, means the class or classes of stock entitled, after the payment of preferred dividends, to a share in the distribution (other than in complete or partial liquidation) within the taxable year of all the remaining earnings and profits, which share constitutes the same proportion of such distribution regardless of the amount of such distribution.

(2)Preferred dividends, for purposes of this section, means a distribution (other than in complete or partial liquidation), limited in amount, which must be made on any class of stock before a further distribution (other than in complete or partial liquidation) of earnings and profits may be made within the taxable year.

Editorial Notes

Amendments

1976—Subsecs. (a), (e). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

§565 Consent Dividends

Summary

Title 26, §565

Notes & Related Subsidiaries

Editorial Notes

Amendments

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