Rev. Rul. 56-211

Advice has been requested as to the proper method of reporting, for Federal income tax purposes, payments received during a taxable year and applied against accumulated dividends on preferred stock.

In 1950 the taxpayer purchased a certain number of shares of cumulative preferred stock of a corporation at 170 x dollars per share. At that time the accumulated dividends on the preferred stock were 150 x dollars per share. In the taxable year 1954 the corporation paid the current dividend of 8 x dollars per share on the preferred stock and 12 x dollars on account of the accumulated dividends.

Section 301 of the Internal Revenue Code of 1954, relating to distributions of property, provides in part:

(c) AMOUNT TAXABLE.-* * *

(1) AMOUNT CONSTITUTING DIVIDEND.-That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.

Section 316 of the Code provides in part:

(a) GENERAL RULE.-For purposes of this subtitle, the term `dividend' means any distribution of property made by a corporation to its shareholders-

(1) out of its earnings and profits accumulated after February 28, 1913, or

(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminuation by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.

Section 39.22(a)-1 of Regulations 118, made applicable to section 301 of the Internal Revenue Code of 1954 by Treasury Decision 6091, C.B. 1954-2, 47, provides that the amount paid by the purchaser of stock to the seller in contemplation of the next dividend payment is an investment of capital and may not be claimed as a deduction from gross income. In I.T. 2569, C.B. X-1, 101 (1931), it is stated that although the purchaser of stock may have every reason to expect the full amount of the regular dividend to be paid after the stock is purchased, the price paid for the stock is the cost of the stock to him.

The Internal Revenue Service has consistently held that dividends on stock do not accrue as interest accrues, but represent ordinary income to the stockholder of record when actually or constructively received by him, regardless of the period for which the dividends are paid. See Julius S. Rippel et al. , 12 B.T.A. 438, and Marcus Frieder et al. , 27 B.T.A. 1239. Compare Estate of Henry W. Putnam v. Commissioner , 324 U.S. 393, Ct. D. 1638, C.B. 1945, 345.

Accordingly, it is held that the entire 20 x dollars per share shall be treated as dividend income in the year received, to the extent it was paid out of the corporation's earnings and profits as defined in section 316(a) of the Code.