A credit will not be allowed for the amount of a dividend credited during the taxable year upon an obligation of the shareholder to the corporation unless it is shown to the satisfaction of the Commissioner that such crediting constituted payment of the dividend to the shareholder within the taxable year. In the case of a stock dividend, if the shares (other than fractional shares payable to bearer) constituting the dividend are not entered or registered on the books of the corporation in the name of the shareholder (or his nominee or transferee) within the taxable year, the dividend will not be deemed to have been paid in such year. Delivery of a certificate, or certificates, for such new shares, within the taxable year, constitutes prima facie evidence of the payment of the dividend. If the dividend is payable in obligations of the corporation, they should be entered or registered in the taxable year on the books of the corporation, in the name of the shareholder (or his nominee or transferee), and, in the case of obligations payable to bearer, should be received in the taxable year by the shareholder (or his nominee or transferee), to constitute payment of the dividend within the taxable year. In the case of a dividend from which the tax has been deducted and withheld as required by section 143 or 144, the dividend is considered as paid when such deducting and withholding occur. (c) Methods of accounting.-The determination of whether a dividend has been paid to the shareholder by the corporation during its taxable year is in no way dependent upon the method of accounting regularly employed by the corporation in keeping its books or upon the method of accounting upon the basis of which the net income of the corporation is computed. See section 43. (d) Records. Every corporation claiming a dividends paid credit shall keep such permanent records as are necessary (1) to establish that the dividends with respect to which such credit is claimed were actually paid during the taxable year and (2) to supply the information required to be filed with the income tax return of the corporation. Such corporation shall file with its return (a) a true copy of the dividend resolution; and (b) a concise statement of the pertinent facts relating to the payment of the dividend, clearly specifying (1) the medium of payment and (2), if not paid in money, the fair market value and adjusted basis (or face value, if paid in its own obligations) on the date of distribution of the property distributed, and the manner in which such fair market value and adjusted basis were determined. Canceled dividend checks and receipts obtained from shareholders acknowledging payment of dividends paid otherwise than by check need not be filed with the return but shall be kept by the corporation as a part of its records. [SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.] (b) Dividend carry-over.-In computing the dividends paid credit for any taxable year, if the dividends paid during the taxable year are less than the adjusted net income, there shall be allowed as part of the dividends paid credit, and in the following order: (1) Dividends paid during the second preceding taxable year in excess of the adjusted net income for such year, to the extent not needed as a dividends paid credit for the taxable year preceding the taxable year the tax for which is being computed; and (2) Dividends paid during the first preceding taxable year in excess of the adjusted net income for such year. No credit shall be allowed for dividends paid by a corporation prior to its first taxable year under this title. ART. 27(b)-1. Dividend carry-over.-A corporation is allowed under section 27(b) to include in its dividends paid credit a dividend carryover from certain preceding taxable years, in addition to the credit for dividends paid during the taxable year. If in the taxable year no dividends are actually paid or if in such year dividends actually paid are less in amount than the adjusted net income for such year, there shall be included as part of the dividends paid credit for such taxable year in the following order— (1) the amount by which dividends which were actually paid during the second preceding taxable year exceeded the adjusted net income for such year, but only to the extent that the excess was not needed as part of the dividends paid credit for the first preceding taxable year (whether or not the part needed was actually included in the dividends paid credit of such first preceding taxable year); and (2) the amount by which the dividends actually paid during the first preceding taxable year exceeded the adjusted net income for such year. The Act prohibits any part of the dividend carry-over from consisting of dividends paid by the corporation during any taxable year or period beginning prior to January 1, 1936. The first taxable year or period for which a corporation may avail itself of the benefit of the dividend carry-over is its second taxable year or period beginning after December 31, 1935. Every corporation claiming a dividend carry-over for any taxable year or period shall file with its return for such year or period a concise statement setting forth the amount of the dividend carryover claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the dividend carry-over claimed. The application of section 27 (b) may be illustrated by the following examples: Example (1): The N Corporation has an adjusted net income of $80,000 for the calendar year 1936, and during that year pays dividends aggregating $90,000. For the calendar year 1937, the corporation has an adjusted net income of $120,000 and during that year pays dividends in the amount of $50,000. The dividends paid credit for the calendar year 1937 is $60,000, computed as follows: Dividends paid during 1936_. Adjusted net income for 1936- $90,000 80,000 Excess of dividends paid during 1936 over adjusted net income for that year---. 10, 000 Dividends paid during 1937 50,000 10, 000 Plus excess of dividends paid during 1936 over adjusted net income for 1936___. Dividends paid credit for 1937 60, 000 Example (2): The R Corporation has an adjusted net income of $60,000 for the calendar year 1936 and during that year pays dividends aggregating $75,000. For the calendar year 1937 the corporation has an adjusted net income of $100,000 and during that year pays dividends aggregating $90,000. During the calendar year 1938 the corporation pays dividends of $50,000, the adjusted net income for that year being $80,000. The dividends paid credit for the calendar year 1937 is $100,000, computed as follows: Dividends paid during 1937_. $90,000 Portion of $15,000, the excess of dividends paid during 1936 ($75,000) over adjusted net income for that year ($60,000) needed as a dividends paid credit for 1937-- 10, 000 100, 000 Dividends paid credit for 1937 The dividends paid credit for the calendar year 1938 is $55,000, computed as follows: Dividends paid during 1938_ $50, 000 Plus: The excess of dividends paid during 1936 over adjusted net income for that year ($75,000-$60,000, or $15,000), to the extent not needed as dividends paid credit for 1937 ($15,000-$10,000) ---Excess of dividends paid during 1937 over adjusted net income for that year--. 5,000 None 55, 000 Dividends paid credit for 1938– As applied to this example, the Act provides for a 2-year dividend carry-over in computing the dividends paid credit for 1938, since the excess ($15,000) of the dividends paid during 1936 over the adjusted net income for that year is allowed as part of the dividends paid credit for 1937 and 1938, $10,000 of such excess being applicable to 1937 and the remaining $5,000 to 1938. Of the $15,000 excess, the entire amount of $10,000 (the difference between the adjusted net income of $100,000 and the dividends of $90,000 paid during 1937) must be applied, if at all, as part of the dividends paid credit for 1937. [SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.] (c) Dividends in kind.—If a dividend is paid in property other than money (including stock of the corporation if held by the corporation as an investment) the dividends paid credit with respect thereto shall be the adjusted basis of the property in the hands of the corporation at the time of the payment, or the fair market value of the property at the time of the payment, whichever is the lower. ART. 27(c)-1. Dividends in kind.-Section 27 (c) imposes limitations upon the extent to which dividends paid in assets (other than money) may be recognized for purposes of determining the amount of the dividends paid credit. Irrespective of the form of the corporate resolution by which a dividend is declared, if the dividend is ultimately and actually paid by the corporation in any property other than money, constituting its corporate assets, the amount of the dividends paid credit to which the corporation is entitled with respect thereto can not exceed the lesser of the two following amounts determined as of the time of payment: (1) The adjusted basis of such property in the hands of the corporation as provided for in section 113; or (2) The fair market value of such property. As used in this article the term "property" includes shares of capital stock of the corporation making the dividend distribution if such shares of stock are held by it as an investment. Unless shown to the contrary, shares of capital stock once issued but thereafter acquired by the corporation in any manner whatsoever, but not retired, shall be deemed to be held by the corporation as an investment. The term "property" also includes obligations upon which the corporation making the distribution is liable as a guarantor, indorser, or surety. The application of section 27 (c) may be illustrated by the following example: Example: The S Corporation, in 1930, purchased stock of the Y Corporation for $100,000. In 1936 such stock had a fair market value of $70,000. During the period of its ownership of such stock, Art. 27 (c)-1 $ 27 the S Corporation received distributions amounting to $5,000 out of earnings or profits of Y Corporation accumulated before March 1, 1913. In 1936 the corporation used such stock for the payment of a dividend. The dividends paid credit for 1936 is $70,000, computed as follows: Purchase price, or cost of stock.. Less tax-free distribution__ Adjusted basis of stock in the hands of the corporation at the time of Fair market value of stock at the time of the dividend payment_--_- $100,000 5, 000 95, 000 70, 000 70, 000 Since the fair market value of the stock ($70,000) at the time of the dividend payment is less than the adjusted basis ($95,000) of the stock in the hands of the corporation at the time of the dividend payment, the lesser amount ($70,000) should be used as the divi dends paid credit for 1936 with respect to such stock. [SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.] (d) Dividends in obligations of the corporation.-If a dividend is paid in obligations of the corporation, the amount of the dividends paid credit with respect thereto shall be the face value of the obligations, or their fair market value at the time of the payment, whichever is the lower. If the fair market value is lower than the face value, then when the obligation is redeemed by the corporation, the excess of the amount for which redeemed over the fair market value at the time of the dividend payment (to the extent not allowable as a deduction in computing net income for any taxable year) shall be treated as a dividend paid in the taxable year in which the redemption occurs. ART. 27(d)-1. Dividends in obligations of the corporation.-Section 27(d) is concerned solely with the amount of dividends paid credit allowable to the extent that dividends are paid by a corporation in its own obligations. If the corporation ultimately pays a dividend in its own obligations (regardless of the form of the corporate resolution by which the dividend is declared), the amount of the dividends paid credit to which it is entitled with respect thereto for the year in which such dividend is paid is limited to the lesser of the face value or fair market value of such obligations as of the date of payment. If the dividends paid credit as of the date of payment is limited to the fair market value of the corporate obligations distributed, the corporation becomes entitled to an additional dividends paid credit for the taxable year in which it redeems such obligations, but only in the event that the amount at which such obligations are redeemed is higher than their fair market value at the time of the |