26 U.S.C. § 1059: Corporate shareholder’s basis in stock reduced by nontaxed portion of extraordinary dividends

The basis of such corporation in such stock shall be reduced (but not below zero) by the nontaxed portion of such dividends. If the nontaxed portion of such dividends exceeds such basis, such excess shall be treated as gain from the sale or exchange of such stock for the taxable year in which the extraordinary dividend is received. the amount of such dividend, over the taxable portion of such dividend. the portion of such dividend includible in gross income, reduced by the amount of any deduction allowable with respect to such dividend under section 243 1 245, or 245A. 1 So in original. Probably should be followed by a comma. The term “extraordinary dividend” means any dividend with respect to a share of stock if the amount of such dividend equals or exceeds the threshold percentage of the taxpayer’s adjusted basis in such share of stock. 5 percent in the case of stock which is preferred as to dividends, and 10 percent in the case of any other stock. which are received by the taxpayer (or a person described in subparagraph (C)) with respect to any share of stock, and which have ex-dividend dates within the same period of 85 consecutive days, which are received by the taxpayer (or a person described in subparagraph (C)) with respect to any share of stock, and which have ex-dividend dates during the same period of 365 consecutive days, the basis of such stock in the hands of such person is determined in whole or in part by reference to the basis of such stock in the hands of the taxpayer, or the basis of such stock in the hands of the taxpayer is determined in whole or in part by reference to the basis of such stock in the hands of such person. If the taxpayer establishes to the satisfaction of the Secretary the fair market value of any share of stock as of the day before the ex-dividend date, the taxpayer may elect to apply paragraphs (1) and (3) by substituting such value for the taxpayer’s adjusted basis. Any reduction in basis under subsection (a)(1) shall be treated as occurring at the beginning of the ex-dividend date of the extraordinary dividend to which the reduction relates. To the extent any dividend consists of property other than cash, the amount of such dividend shall be treated as the fair market value of such property (as of the date of the distribution) reduced as provided in section 301(b)(2). For purposes of determining the holding period of stock under subsection (a), rules similar to the rules of paragraphs (3) and (4) of section 246(c) shall apply and there shall not be taken into account any day which is more than 2 years after the date on which such share becomes ex-dividend. The term “ex-dividend date” means the date on which the share of stock becomes ex-dividend. The term “dividend announcement date” means, with respect to any dividend, the date on which the corporation declares, announces, or agrees to the amount or payment of such dividend, whichever is the earliest. such stock was held by the taxpayer during the entire period such corporation was in existence, and except as provided in regulations, no earnings and profits of such corporation were attributable to transfers of property from (or earnings and profits of) a corporation which is not a qualified corporation. with respect to which the taxpayer holds directly or indirectly during the entire period of such corporation’s existence at least the same ownership interest as the taxpayer holds in the corporation distributing the extraordinary dividend, and which were earned by, or which are attributable to gain on property which accrued during a period the corporation holding the property was, This paragraph shall not apply to any extraordinary dividend to the extent such application is inconsistent with the purposes of this section. which is part of a partial liquidation (within the meaning of section 302(e)) of the redeeming corporation, which is not pro rata as to all shareholders, or any options had not been taken into account under section 318(a)(4), or section 304(a) had not applied, An exchange described in section 356 which is treated as a dividend shall be treated as a redemption of stock for purposes of applying subparagraph (A). Except as provided in regulations, the term “extraordinary dividend” does not include any qualifying dividend (within the meaning of section 243). were earned by a corporation during a period it was not a member of the affiliated group, or are attributable to gain on property which accrued during a period the corporation holding the property was not a member of the affiliated group. this section shall not apply to such dividends if the taxpayer holds such stock for more than 5 years, and the qualified preferred dividends paid with respect to such stock during the period the taxpayer held such stock, over the qualified preferred dividends which would have been paid during such period on the basis of the stated rate of return. by only taking into account dividends during such period, and by using the lesser of the adjusted basis of the taxpayer in such stock or the liquidation preference of such stock. The stated rate of return shall be the annual rate of the qualified preferred dividend payable with respect to any share of stock (expressed as a percentage of the amount described in clause (i)(II)). provides for fixed preferred dividends payable not less frequently than annually, and is not in arrears as to dividends at the time the taxpayer acquires the stock. In determining the holding period for purposes of subparagraph (A)(ii), subsection (d)(3) shall be applied by substituting “5 years” for “2 years”. Any dividend with respect to disqualified preferred stock shall be treated as an extraordinary dividend to which paragraphs (1) and (2) of subsection (a) apply without regard to the period the taxpayer held the stock. when issued, such stock has a dividend rate which declines (or can reasonably be expected to decline) in the future, the issue price of such stock exceeds its liquidation rights or its stated redemption price, or to avoid the other provisions of this section, and to enable corporate shareholders to reduce tax through a combination of dividend received deductions and loss on the disposition of the stock. providing for the application of this section in the case of stock dividends, stock splits, reorganizations, and other similar transactions, in the case of stock held by pass-thru entities, and in the case of consolidated groups, and providing that the rules of subsection (f) shall apply in the case of stock which is not preferred as to dividends in cases where stock is structured to avoid the purposes of this section. The amendments made by this section [amending this section] shall apply to distributions after May 3, 1995 . a written binding contract in effect on May 3, 1995 , and at all times thereafter before such distribution, or a tender offer outstanding on May 3, 1995 . In determining whether the amendment made by subsection (a) applies to any extraordinary dividend other than a dividend treated as an extraordinary dividend under section 1059(e)(1) of the Internal Revenue Code of 1986 (as amended by this Act), paragraphs (1) and (2) shall be applied by substituting ‘ September 13, 1995 ’ for ‘ May 3, 1995 ’.” Except as provided in paragraph (2), the amendment made by subsection (a) [amending this section] shall apply to stock issued after July 10, 1989 , in taxable years ending after such date. The amendment made by subsection (a) shall not apply to any stock issued pursuant to a written binding contract in effect on July 10, 1989 , and at all times thereafter before the stock is issued.” Except as provided in this subsection, the amendments made by this section [amending this section] shall apply to dividends declared after July 18, 1986 , in taxable years ending after such date. For purposes of section 1059(c)(3) of the Internal Revenue Code of 1986, dividends declared after July 18, 1986 , shall not be aggregated with dividends declared on or before July 18, 1986 . Section 1059(e)(1) of the Internal Revenue Code of 1986 (as added by subsection (e)) shall apply to dividends declared after the date of the enactment of this Act [ Oct. 22, 1986 ], in taxable years ending after such date.” Except as provided in this subsection, the amendments made by this section [enacting this section and amending sections 246, 1016, and 7701 of this title] shall apply to distributions after March 1, 1984 , in taxable years ending after such date. The amendments made by subsection (b) [amending section 246 of this title ] shall apply to stock acquired after the date of the enactment of this Act [ July 18, 1984 ] in taxable years ending after such date. Except as otherwise provided in subparagraph (B), the amendment made by subsection (c) [amending section 7701 of this title ] shall take effect on July 18, 1984 . term loans made after July 18, 1984 , and demand loans outstanding after July 18, 1984 (other than any loan outstanding on July 18, 1984 , and repaid before September 18, 1984 ). For purposes of this paragraph, any loan renegotiated, extended, or revised after July 18, 1984 , shall be treated as a loan made after such date. For purposes of this paragraph, the terms ‘demand loan’ and ‘term loan’ have the respective meanings given such terms by paragraphs (5) and (6) of section 7872(f) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], except that the second sentence of such paragraph (5) shall not apply.”