Declared dividends are taxable before later cash payment

Plain-English summary

An individual owned all of one corporation and a majority of another. Both corporations declared dividends, recorded the amounts on their books, and remained solvent with enough assets to pay them at the time. Some amounts were not paid before local tax authorities later suspended payments and seized corporate assets. The IRS held that all of the distributions were constructively received by the shareholder and treated as dividends under sections 301 and 316 in the years they were declared, not in the later year when actual payment was expected.

Ruling snapshot

• Question: In which years must the shareholder recognize declared but unpaid corporate dividends?
• Outcome: approved
• Key authorities: IRC §§ 301, 316, 451

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201741012                                              Third Party Communication: None
Release Date: 10/13/2017                                       Date of Communication: Not Applicable
Index Number: 301.03-01, 301.03-00,
              451.14-00, 451.14-05                             Person To Contact:
                                                               ---------------------------, ID No. ---------------
-------------------------------                                -----------------
----------------------------                                   Telephone Number:
--------------------------------------                         ----------------------
                                                               Refer Reply To:
                                                               CC:CORP:1
                                                               PLR-114088-17
                                                               Date:
                                                               July 11, 2017




Legend

Taxpayer =                 --------------------------
                            --------------------------

Corporation A =             --------------------------------
---------------------------------------------------------
------------------------------------------------------
----------------------------------------------------

Corporation B =             ----------------------
---------------------------------------------------------
------------------------------------------------------
----------------------------------------------------

Year 1 =                   -------

Year 2 =                   -------

Year 3 =                   -------

Year 4 =                   -------

Date A =                   ----------------------

Date B =                   -------------------

Date C =                   -------------------
PLR-114088-17                                             2



Date D =                  -------------------

Date E =                  -------------------

Date F =                  -------------------

Date G =                  ----------------------

Date H =                  --------------------------

Date I =                  --------------------------

A=                        -----------------------------

B=                        -----------------------------

C=                        -----------------------------

D=                        ---------------------------

E=                        -------------------------

F=                        -------------------------

DD =            ----------------------------------

EE =            ----------------------------------

FF =                      -------------------------


Dear -----------------:

This letter responds to your April 26, 2017, request for a ruling on the federal income tax
treatment of several declared but unpaid dividends under sections 301 and 316 of the
Internal Revenue Code (Code). Additional information was submitted in
correspondence dated June 9 and June 26, 2017. The material information submitted
in that request and in subsequent correspondence is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the material submitted in
PLR-114088-17                                  3


support of the request for rulings; according, all such material is subject to verification
on examination.

Facts

Throughout Year 1, Year 2, and Year 3, Taxpayer, an individual, was the sole
shareholder of Corporation A and the majority shareholder of Corporation B.

During those years, Corporation A declared dividends payable to Taxpayer in the
amounts of A, B, and C by Founder’s Resolutions dated Date A, Date B, and Date C,
respectively. All of these amounts were recorded on Corporation A’s General Ledger
as amounts credited to Taxpayer’s account. At all times throughout Year 1, Year 2,
and Year 3, Corporation A was solvent with sufficient assets available to support
payment of the distribution.

Also during those years, Corporation B declared gross dividends in the amounts of D, E,
and F by unanimous decision of the company’s members on Date D, Date E, and Date
F, respectively. Of these amounts, Taxpayer’s pro rata share was DD, EE, and FF,
respectively. All of these amounts were recorded on Corporation B’s books. Of such
amounts, DD and EE were actually paid to Taxpayer in Year 1 and Year 2, respectively,
but FF was not. At all times throughout Year 1, Year 2, and Year 3, Corporation B was
solvent with sufficient assets available to support payment of the distribution.

On Date G, a date subsequent to the declaration and recording of all dividend
distributions described above, local tax authorities suspended payments to be made by
Corporation A; later, on Date H, the local tax authorities seized Corporation A’s assets.
Subsequently, on Date I, local tax authorities suspended payments to be made by
Corporation B and seized Corporation B’s assets.

The issues with the local tax authority have been resolved. As a result, Corporation A
and Corporation B are expected to begin actually paying the dividends to Taxpayer in
Year 4.

Based solely on the information submitted and the representations set forth above, we
hold as follows:

Ruling

For federal income tax purposes, the distributions of A, B, and C by Corporation A and
of DD, EE, and FF by Corporation B were constructively received by Taxpayer, and are
thus treated as dividends within the meaning of section 301 and section 316 of the
Code, in the years they were declared and not in the year of actual receipt.
PLR-114088-17                                  4



Caveat

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

Procedural Statements

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                       Sincerely,


                                        Theresa Ann Abell
                                       Theresa Ann Abell
                                       Senior Technician Reviewer
                                       Office of Associate Chief Counsel (Corporate)




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