3 returns of capital that exceed the stockholders

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3. Returns of capital that exceed the stockholder’s basis in stock are typically treated as capital gains. Stock Dividends Stock dividends are additional distributions of corporate stock to shareholders. Whether a stock dividend is taxable or not depends upon whether or not it is proportional . Most stock dividends are proportional stock dividends in that the shareholder has the same proportional interest in the corporation after the dividend as before the dividend. The shareholder simply receives more shares and no additional assets of value. For example, if a corporation pays a 10% stock dividend, the corporation has 10% more outstanding shares after the dividend. A shareholder owning 1,000 shares now has 1,100 shares. If he had paid $10,000 for the original shares, he simply divides that amount by the new number of shares and now has a cost basis of $9.09 per share. The proportional style of stock dividend is not taxable. The taxpayer’s total cost basis in the stock is the same but the cost basis per share is lower after the stock dividend.
Non-proportional stock dividends are those that have a strong potential to alter ownership interests in a corporation. For example, if a company offers a 10% stock dividend but shareholders have the option of taking the dividend in stock or cash for the market value of the shares, ownership interests will be altered and those shareholders taking cash will effectively sell some of the corporate interests for a different asset – cash. Non-proportional stock dividends are taxable income. The basis of the new stock received will equal the amount of income recognized from the taxable dividend. Dividends on Life Insurance Contracts – not really dividends and usually not taxable Dividends on life insurance contracts are not dividends in the traditional sense. They are considered refunds of previously paid premiums. These amounts are not considered taxable income. The dividends are considered nontaxable refunds of nondeductible amounts paid (see the tax benefit rule). If these payments exceed the remaining cost basis of the insurance contract they are taxable. G. Alimony and Separate Maintenance Payments 1. Historically, alimony was included in gross income of the recipient and deducted by the payor. Alimony must be paid pursuant to an approved written agreement between the parties, paid in cash for spousal benefit, must terminate at death, and the parties must be living in separate households. 2. Alimony represents maintenance payments from one spouse to a former spouse – not a property settlement between spouses. Alimony recapture rules exist to discourage disguising non-deductible property settlement payments as deductible alimony. 3. NOTE: THE 2017 TAX LAW ELIMINATED THE ABOVE TREATMENT FOR ALIMONY FOR DIVORCES BEGINNING IN 2019 (alimony will not be taxable to the recipient nor deductible by the payor for divorces after 2018).

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