Sec. 316. Dividend defined
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 diminution
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.
Except as otherwise provided in this subtitle, every distribution
is made out of earnings and profits to the extent thereof, and from
the most recently accumulated earnings and profits. To the extent
that any distribution is, under any provision of this subchapter,
treated as a distribution of property to which section 301 applies,
such distribution shall be treated as a distribution of property
for purposes of this subsection.
(1) Certain insurance company dividends
The definition in subsection (a) shall not apply to the term
''dividend'' as used in subchapter L in any case where the
reference is to dividends of insurance companies paid to
policyholders as such.
(2) Distributions by personal holding companies
(A) In the case of a corporation which -
(i) under the law applicable to the taxable year in which
the distribution is made, is a personal holding company (as
defined in section 542), or
(ii) for the taxable year in respect of which the
distribution is made under section 563(b) (relating to
dividends paid after the close of the taxable year), or
section 547 (relating to deficiency dividends), or the
corresponding provisions of prior law, is a personal holding
company under the law applicable to such taxable year,
the term ''dividend'' also means any distribution of property
(whether or not a dividend as defined in subsection (a)) made
by the corporation to its shareholders, to the extent of its
undistributed personal holding company income (determined under
section 545 without regard to distributions under this
paragraph) for such year.
(B) For purposes of subparagraph (A), the term ''distribution
of property'' includes a distribution in complete liquidation
occurring within 24 months after the adoption of a plan of
liquidation, but -
(i) only to the extent of the amounts distributed to
distributees other than corporate shareholders, and
(ii) only to the extent that the corporation designates
such amounts as a dividend distribution and duly notifies
such distributees of such designation, under regulations
prescribed by the Secretary, but
(iii) not in excess of the sum of such distributees'
allocable share of the undistributed personal holding company
income for such year, computed without regard to this
subparagraph or section 562(b).
Sections 331(b) Ex. 2, 316(b)(2)
Assumptions: E&P accumulated as of the beginning of the year is 0. E&P for the current year (i.e., prior to the liquidation) = 30. X is a personal holding company and undistributed personal holding company income (before dividend paid deduction) = 50. The liquidation occurs within 24 months after adoption of the plan. The corporation designates 45 of the liquidating distribution as a dividend and so notifies A of this fact.
Treatment: While a liquidating distribution is normally not treated as a dividend, a different rule applies here. §331(b). Here, because X is a personal holding company which liquidated within 24 months of adopting a plan to do so, and A is not a corporation and X designates 45 of the distribution as a dividend (and so notifies A), X is considered as having paid a dividend of 45. §316(b)(2). Accordingly, in computing its personal holding company tax, X is allowed a dividend paid deduction of 45.
(3) Deficiency dividend distributions by a regulated investment
company or real estate investment trust
The term ''dividend'' also means any distribution of property
(whether or not a dividend as defined in subsection (a)) which
constitutes a ''deficiency dividend'' as defined in section