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Publication 17

Nondividend Distributions(p67)

A nondividend distribution is a distribution that isn't paid out of the earnings and profits of a corporation or a mutual fund. You should receive a Form 1099-DIV or other statement showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you don't receive such a statement, you report the distribution as an ordinary dividend.

Basis adjustment. (p67)

A nondividend distribution reduces the basis of your stock. It isn't taxed until your basis in the stock is fully recovered. This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first.
When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. See Holding Period in chapter 14.

Example. (p67)

You bought stock in 2004 for $100. In 2007, you received a nondividend distribution of $80. You didn't include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2017. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2017. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years.

Liquidating Distributions(p67)

Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of a return of capital. They may be paid in one or more installments. You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9.
For more information on liquidating distributions, see chapter 1 of Pub. 550.

Distributions of Stock and Stock Rights(p67)

Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as stock options) are distributions by a corporation of rights to acquire the corporation's stock. Generally, stock dividends and stock rights aren't taxable to you, and you don't report them on your return.

Taxable stock dividends and stock rights. (p67)

Distributions of stock dividends and stock rights are taxable to you if any of the following apply.
  1. You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights.
  2. The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders.
  3. The distribution is in convertible preferred stock and has the same result as in (2).
  4. The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders.
  5. The distribution is on preferred stock. (The distribution, however, isn't taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right.)
The term "stock" includes rights to acquire stock, and the term "shareholder" includes a holder of rights or of convertible securities.
If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income.
Preferred stock redeemable at a premium. (p68)
If you receive preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. For more information, see chapter 1 of Pub. 550.

Basis. (p68)

Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. If you receive stock or stock rights that aren't taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Pub. 550 for information on how to figure their basis.

Fractional shares. (p68)

You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares aren't issued but instead are sold, and the cash proceeds are given to the shareholders. Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. Enter your gain or loss (the difference between the cash you receive and the basis of the fractional shares sold) in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate.
Report these transactions on Form 8949. Also, check the correct box to show how the transaction was reported on Form 1099-B.
For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Pub. 550. Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040).

Example. (p68)

You own one share of common stock that you bought on January 3, 2008, for $100. The corporation declared a common stock dividend of 5% on June 30, 2017. The fair market value of the stock at the time the stock dividend was declared was $200. You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. You figure your gain or loss as follows:
Fair market value of old stock $200.00
Fair market value of stock dividend (cash received) +10.00
Fair market value of old stock and stock dividend $210.00
Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100)$95.24
Basis (cost) of stock dividend (($10 ÷ $210) × $100)+ 4.76
Cash received$10.00
Basis (cost) of stock dividend − 4.76
Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain.
Scrip dividends. (p68)
A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. The certificate is generally nontaxable when you receive it. If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate.
However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. You must include its fair market value in income on the date you receive it.