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property exceeds the property's adjusted basis in the hands of
the distributing corporation, the corporation must recognize a
gain as if the property were sold to the shareholder at its FMV.
Section 1.301-1(j), Income Tax Regs., provides that when an
individual shareholder purchases property from a corporation for
an amount less than the property's FMV, the shareholder may be
deemed to have received a distribution to which section 301
applies, i.e., a dividend, to the extent the FMV exceeds the
amount paid by the shareholder for the property. See Palmer v.
Commissioner, 302 U.S. 63, 69-70 (1937); Green v. United States,
460 F.2d 412, 419 (5th Cir. 1972); Brittingham v. Commissioner,
66 T.C. 373, 409-410 (1976), affd. per curiam 598 F.2d 1375 (5th
Cir. 1979).
The term "dividend" is defined in section 316(a) as a
distribution of property by a corporation to its shareholders out
of its earnings and profits. Dividends are includable in the
gross income of a shareholder to the extent of the corporation's
earnings and profits for the calendar year when the dividend is
paid, along with accumulated earnings and profits. See secs.
301(c)(1), 316(a); Truesdell v. Commissioner, 89 T.C. 1280, 1294-
1295 (1987). There is no requirement that the dividend be
formally declared or even intended by the distributing
corporation. Sachs v. Commissioner, 277 F.2d 879 (8th Cir.
1960), affg. 32 T.C. 815 (1959).
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Last modified: May 25, 2011