§565 Consent Dividends

Summary

If a person owns "consent stock" on the last day of a corporation’s tax year and files a written consent with the corporation’s tax return following IRS rules, agreeing to treat a stated amount as a dividend, that stated amount will count as a "consent dividend" for the corporation’s dividends-paid deduction (section 561), unless limited by the rules below. A consent dividend will not count if it would be part of a distribution disqualified as a preferential dividend (section 562(c)), or if the amounts named in all consents would not be dividends if they had actually been paid in cash on that day. The consent amount is treated as if the corporation paid that cash to the shareholder on the last day of the tax year and also as if the shareholder contributed that same amount to the corporation’s capital. If a distribution mixes consent dividends and real cash or property, all amounts are added together for tax purposes. If a consent dividend would require U.S. withholding tax on a nonresident or foreign shareholder (sections 1441 or 1442), the consent only works if it is filed with enough cash or other approved payment to cover the withholding. That payment is credited against the shareholder’s tax. Consent stock: a class of shares that, after preferred dividends are paid, shares the rest of the year’s earnings in a fixed proportion. Preferred dividends: limited amounts that must be paid on some stock before any further distributions that year.