Sec. 316. Dividend defined
 
(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 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.
 (b) Special rules
 (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
 860(f).