4.8 Taxable Stock Dividends

The most frequent type of stock dividend is not taxable: the receipt by a common stockholder of a corporation’s own common stock as a dividend (4.6).

Taxable stock dividends.

The following stock dividends are taxable:

• Stock dividends paid to holders of preferred stock. However, no taxable income is realized where the conversion ratio of convertible preferred stock is increased only to take account of a stock dividend or split involving the stock into which the convertible stock is convertible.
• Stock dividends elected by a shareholder of common stock who had the choice of taking stock, property, or cash. A distribution of stock that was immediately redeemable for cash at the stockholder’s option was treated as a taxable dividend.
• Stock dividends paid in a distribution where some shareholders receive property or cash and other shareholders’ proportionate interests in the assets or earnings and profits of the corporation are increased.
• Distributions of preferred stock to some common shareholders and common stock to other common shareholders.
• Distributions of convertible preferred stock to holders of common stock, unless it can be shown that the distribution will not result in the creation of disproportionate stock interests.

Constructive stock dividends.

You may not actually receive a stock dividend, but under certain circumstances, the IRS may treat you as having received a taxable distribution. This may happen when a company increases the ratio of convertible preferred stock.