§565 Consent Dividends

Summary

A shareholder who owns "consent stock" on the last day of the corporation’s tax year can sign and file a consent with the corporation’s tax return, saying a specific amount should be treated as a dividend. If the consent follows the government’s rules, that amount is a "consent dividend" for the corporation’s dividends-paid tax deduction, except in two cases: it cannot include amounts that would be disqualified as preferential dividends, and it cannot include amounts that would not be a dividend if all consents were paid in cash to shareholders on that day. A consent dividend is treated as if the corporation paid that money to the shareholder on the last day of the tax year and as if the shareholder contributed the same amount to the company’s capital. If the corporation also pays cash or property, all amounts are counted together for tax rules. If the consent dividend would require withholding because the shareholder is a nonresident or a foreign company, the consent must be filed with money (or another allowed payment) equal to the needed withholding; that amount is credited against the shareholder’s tax. Consent stock means the class of shares that, after required preferred dividends, gets the same share of the year’s remaining earnings no matter how much is distributed. Preferred dividends are limited amounts that must be paid to a class of stock before other distributions that year.