(2) If, at any time during such year, the corporation has taken any steps in, or in pursuance of a plan of, complete or partial liquidation of all or any part of the consent stock.

of the same class, or if there is distributed to all the shareholders of one class of consent stock in the aggregate more or less than their pro rata part of a distribution as compared with the distribution made to all the shareholders of any other class of consent stock. If such preference exists, the entire distribution is preferential. Section 28 (a) (6) may be illustrated with other requirements of section 28, by the following examples:

Example (1). The X Corporation, which makes its income tax returns on the calendar year basis, has one class of consent stock outstanding, owned in equal amounts by A, B, and C. On December 15, 1938, the corporation makes a distribution in cash of $5,000 each to A and B, and $3,000 to C. The distribution is preferential. If A and B each receives a distribution in cash of $5,000 and C consents to include $3,000 in gross income as a taxable dividend, the combined actual and consent distribution is preferential. Similarly, if no one receives a distribution in cash, but A and B each consents to include $5,000 as a taxable dividend in gross income but C agrees to include only $3,000, the consent distribution is preferential.

Example (2). The Y Corporation, which makes its income tax returns on the calendar year basis, has only two classes of stock outstanding, each class being consent stock and consisting of 500 shares. Class A, with a par value of $40 per share, is entitled to two-thirds of any distribution of earnings and profits. Class B, with a par value of $20 per share, is entitled to one-third of any distribution of earnings and profits. On December 15, 1938, there is distributed on the class A stock $2 per share, or $1,000, and on the class B stock $2 per share, or $1,000. The distribution is preferential, inasmuch as the class B stock has received more than its pro rata share of the distribution.*†

[SEC. 28. Consent dividends credit.]

(b) Corporations not entitled to credit.— A corporation shall not to be entitled to a consent dividends credit with respect to any taxable year

(1) Unless, at the close of such year, all preferred dividends (for the taxable year and, if cumulative, for prior taxable years)

have been paid; or

1 So in original.

§ 9.28 (b)-1 Payment of preferred dividends. Section 28 (b) (1) provides that a corporation shall not be entitled to a consent dividends credit for any taxable year, regardless of compliance

unless at the close of such year all preferred dividends (for the taxable year and, if cumulative, for prior taxable years) have been paid. Whatever form such payment takes, it must result in the complete discharge of the obligation of the corporation to pay such dividends. For what constitutes payment of a dividend before the close of the taxable year, see § 9.27 (b)-2. For what constitutes a preferred dividend see section 28 (a) (2). A preferred dividend will be considered paid for the purposes of this requirement, even though it is paid as part of a preferential dividend as defined in section 27 (h), and the corporation receives no credit for dividends paid in consequence thereof.*†

§ 9.28 (b)-2 Liquidation of consent stock. A corporation is not entitled to a consent dividends credit for any taxable year in which it has taken any steps in, or in pursuance of a plan of, complete or partial liquidation of all or any part of the consent stock.

Example. The X Corporation, which makes its income tax returns on the calendar year basis, has outstanding on January 1, 1938, 1,000 shares of class A stock, the dividend rights of which are limited to an annual return of $6 per share. It also has outstanding on that date 1,000 shares of class B stock, which is entitled to receive the entire amount of any distribution made of earnings or profits within the taxable year after the payment on class A of $6 per share. On April 1, 1938, the corporation makes a distribution in partial liquidation, whereby five shares of class B stock (consent stock) are canceled or redeemed. The corporation is barred from obtaining a consent dividends credit for the taxable year, regardless of compliance with other requirements of section 28. If, however, class A stock (not consent stock), instead of class B stock, had been can

celed or redeemed in the liquidation, | earnings and profits for the calendar the corporation would not be barred, because of such liquidation, from obtaining a consent dividends credit.

year 1938 amount to $8,000, there being at the beginning of the year 1938 no accumulated earnings or profits. A and B execute proper consents to include $5,000 each in.their gross income as a dividend received by them on December 31, 1938. The sum of the amount specified in the consents executed by A and B is $10,000, but if $10,000 had actually been distrib

The mere purchase by a corporation of its own stock for investment is not, within the meaning of section 28 (b) (2), the taking of any step in, or in pursuance of a plan of, complete or partial liquidation and will not prevent a corporation from obtaining a consent divi-uted by the X Corporation on December dends credit for the taxable year.*+

[SEC. 28. Consent dividends credit.]

(c) Allowance of credit.-There shall be allowed to the corporation, as a part of its basic surtax credit for the taxable year, a consent dividends credit equal to such portion of the total sum agreed to be included in the gross income of shareholders by their consents filed under subsection (d) as it would have been entitled to include in

computing its basic surtax credit if actual distribution of an amount equal to such

total sum had been made in cash and each shareholder making such a consent had received, on the consent dividends day, the amount specified in the consent.

31, 1938, only $8,000 would have constituted a dividend. The allowance for dividends paid, includible in the computation of the basic surtax credit, would have amounted to only $8,000. The consent dividends credit of the corporation, therefore, is limited to $8,000.*†

[SEC. 28. Consent dividends credit.]

(d) Shareholders' consents.-The corporation shall not be entitled to a consent dividends credit with respect to any taxable

year

(1) Unless it files with its return for such year (in accordance with regulations prescribed by the Commissioner with the ap

were

made under oath by persons who shareholders, on the last day of the taxable year of the corporation, of any class of consent stock; and

(2) Unless in each such consent the shareholder agrees that he will include as a taxable dividend, in his return for the taxable year in which or with which the taxable year of the corporation ends, a specific amount; and

(3) Unless the consents filed are made by such of the shareholders and the amount specified in each consent is such, that the consent distribution would not have been a preferential distribution

§ 9.28 (c)-1 Amount of consent divi-proval of the Secretary) signed consents dends credit. The consent dividends credit forms part of the basic surtax credit (see section 27 (b) (1)). It consists of the amount which the corporation would be permitted to include in its basic surtax credit as a dividend paid if it had distributed to each shareholder whose consent has been filed pursuant to section 28 (d), and each such shareholder had received, on the consent dividends day (see section 28 (a) (3)), an amount equal to the amount specified in such consent. The amount of the consent dividends credit, therefore, cannot exceed the sum of the amounts specified in the several consents. It may, however, regardless of the fact that such amounts are treated and taxed in their entirety to the consenting shareholders as a dividend (see section 28 (f)), be smaller than the sum of the specified amounts, because it is limited to the amount which would have been allowed as dividends paid if an actual distribution had been made.

The provisions of section 28 (c) may be illustrated by the following example: Example. The X Corporation, which makes its income tax returns on the calendar year basis, has only one class of stock outstanding, owned in equal amounts by A and B. It makes no distributions during the taxable year. Its

(A) If there was no partial distribution during the last month of the taxable year of the corporation, or

(B) If there was such a partial distribution, then when considered in connection with such partial distribution; and shareholder who is taxable with respect to (4) Unless in each consent made by a a dividend only if received from sources within the United States, such shareholder agrees that the specific amount stated in the consent shall be considered as a dividend received by him from sources within the United States; and

(5) Unless each consent filed is accompanied by cash, or such other medium of payment as the Commissioner may by regulations authorize, in an amount equal to the amount that would be required by section 143 (b) or 144 to be deducted and withheld by the corporation if the amount specified in the consent had been, on the last day of the taxable year of the corporation, paid to the shareholder in cash as a dividend. The amount accompanying the consent shall be credited against the tax

imposed by section 211 (a) or 231 (a) upon | specified in such consent had, on the last the shareholder.

In the event that any consent filed by the corporation is made by a shareholder in the payment to whom of a dividend in cash, on the last day of the taxable year of the corporation, the corporation would have been required to deduct and withhold any amount as a tax under sec-poration under subsection (d) there is made tion 143 (b) or 144, such consent, when filed by the corporation, must be accompanied by payment of the amount which would have been required to be deducted and withheld if the amount

tion does not affect the taxability to a shareholder whose consent has been filed of the amount specified in his consent. Thus, he is taxable on the full amount so specified, though the corporation receives no credit or a smaller credit than the sum of the amounts specified in the consents because the corporation has no earnings and profits or a smaller amount of earnings and profits than the sum of the amounts

§ 9.28 (e)-1 Consent and partial distributions to be considered together. The rule provided in section 28 (e), that a consent distribution and a partial distribution are to be considered as having been made in connection with each other and as together forming parts of one entire distribution, is not limited to the purposes of section 28, but is applicable in connection with any of the purposes of Title I. Thus, such rule is to be applied to determine whether a partial distribution is a preferential dividend un-specified in the consents. The full der section 27 (h). See § 9.27 (h)-1.*†

amount specified in a shareholder's consent which has been filed is also taxable to him as a dividend though a consent dividends credit is denied the cor

[SEC. 28. Consent dividends credit.] (f) Taxability of amounts specified in consents. The total amount specified in a consent filed under subsection (d) shall be included as a taxable dividend in the gross in-poration because (i) preferred dividends

come of the shareholder making such consent, and, if the shareholder is taxable with respect to a dividend only if received from sources within the United States, shall be included in the computation of his tax as a dividend received from sources within the United States; regardless of—

(1) Whether he actually so includes it in his return; and

(2) Whether the distribution by the corporation of an amount equal to the total sum included in all the consents filed, had actual distribution been made, would have been in whole or in part a taxable dividend; and (3) Whether the corporation is entitled to any consent dividends credit by reason of the filing of such consents, or to a credit less than the total sum included in all the consents filed.

have not been paid, (ii) part or all of the consent stock has been in a state of liquidation at any time during the taxable year, (iii) the distribution of which the consent distribution is a part is preferential, (iv) a consenting shareholder who is taxable with respect to a dividend only if received from sources within the United States fails to agree that the amount specified in his consent shall be considered as a dividend received by him from sources within the United States, or (v) payment has not been made as required by section 28 (d) (5) and § 9.28 (d)−1.*†

[SEC. 28. Consent dividends credit.]

§ 9.28 (f)-1 Taxability of amounts specified in consents. Once a shareholder's consent is filed, the full amount specified therein shall be included in his gross income as a taxable dividend, and, in cases where the shareholder is tax-lated earnings and profits. able on a dividend only if received from sources within the United States, shall be treated as a dividend so received; regardless of—

(g) Corporate shareholders.-If the shareholder who makes the consent is a corporation, the amount specified in the consent shall be considered as part of its earnings included in the computation of its accumuor profits for the taxable year, and shall be

(1) whether he actually so includes it in his return;

(2) whether he would have been taxable on all or any part of such amount as a dividend if it had been distributed to him in cash; and

(3) whether the corporation, as a result of filing such consents, is entitled to any consent dividends credit or to a smaller consent dividends credit than the sum of the amounts specified in the several consents.

The ground upon which a consent dividends credit is denied the corpora

§ 9.28 (g)-1 Treatment of a mount specified in consent of corporate shareholder. From the standpoint of computing a shareholder's income for a taxable year relative to which he has agreed to include a specific amount in gross income, such amount is treated exactly as though such shareholder had received in cash a taxable dividend equal to the amount specified in his consent. Therefore, in the case of a corporate shareholder, such amount shall be included in the computation of its earnings and profits for the taxable year and its accumulated earnings and profits as of the close of the taxable year. The effect of a corporate shareholder's consent upon the computation of its earnings

*For statutory and source citations, see note to § 9.1-1.

Page 1717

and profits may be illustrated as consent distribution evidenced by A's follows:

consent and the actual distribution to B are treated together, as though one distribution of $100 had been made. The earnings and profits of the X Corporation for 1938, however, amount to only $80, there being at the beginning of the year 1938 no accumulated earnings or profits. If, therefore, the entire $100, which is the sum of A's consent distribution and B's actual distribution, had been actually distributed, 80 percent thereof would have been a dividend, includible in the X Corporation's basic surtax credit, and 20 percent a return of capital. Applying this principle to the facts stated, the following results are obtained:

(1) In the case of the X Corporation

Example. The X Corporation has one shareholder, the Y Corporation, whose consent to include $10,000 in its gross income for the calendar year 1938 has been duly made and filed. The earnings and profits of the X Corporation for the calendar year 1938 amount to only $8,000, there being at the beginning of the year 1938 no accumulated earnings or profits. The Y Corporation must nevertheless include in its gross income $10,000 as a taxable dividend. Assume the Y Corporation to have begun the year 1938 with $5,000 accumulated earnings and profits, to have made no distributions during the year, and (without considering the amount specified in its consent) to have had neither profit nor loss during the year. Its earnings and profits for the year will be $10,000 and its accumulated earnings and profits at the close of the year will be $15,000.*† (ii) Its basic surtax credit, assuming it [SEC. 28. Consent dividends credit.] has no net operating loss in the preced(h) Basis of stock in hands of shareholȧ-ing year and no bank affiliate credit, is ers. The amount specified in a consent made under subsection (d) shall, for the purpose of adjusting the basis of the consent stock with respect to which the consent was given, be treated as having been reinvested by the shareholder as a contribution to the capital of the corporation; but only in an amount which bears the same ratio to the consent dividends credit of the corporation as the amount of such share-transfer of $40 (the amount of the conholder's consent stock bears to the total amount of consent stock with respect to which consents are made.

(i) Effect on capital account of corporation. The amount of the consent dividends

credit allowed under subsection (c) shall be considered as paid in surplus or as a contribution to the capital of the corporation, and the accumulated earnings and profits as of the close of the taxable year shall be correspondingly reduced.

§ 9.28 (i)-1 Effect on basis of stock in hands of shareholders and capital account of corporation. The application of sections 28 (h) and 28 (1) may be illustrated by the following example:

Example. The X Corporation, which makes its income tax returns on the calendar year basis, has only one class of stock outstanding, owned entirely by A and B in equal amounts. A makes a consent to include $50 in his gross income as a dividend, but B refuses to do So. The X Corporation therefore distributes $50 to B in cash during the last month of its taxable year 1938. The

(i) Its consent dividends credit is $40, being 80 percent of the amount specified in A's consent;

$80, composed of a consent dividends credit of $40 and an allowance for dividends paid of $40;

(iii) The amount of its accumulated earnings and profits as of the close of the taxable year is zero, because of the

sent dividends credit) from earnings and profits to capital account and the deduction of an additional $40 on account of dividends paid to B. If, therefore, in the following year the X Corporation has no earnings and profits but nevertheless makes a distribution to shareholders, no part of such distribution will be a dividend, but it will all constitute a return of capital.

(2) In the case of A

(i) A is taxable on $50 as a dividend; (ii) The basis of his stock is increased by $40, his pro rata share, i. e., all, of the consent dividends credit.

(3) In the case of B

(i) B is taxable on $40 as a dividend; (ii) The basis of his stock is reduced by $10.*†

[SEC. 28. Consent dividends credit.]

(j) Amounts not included in shareholder's return.-The failure of a shareholder of con

sent stock to include in his gross income for the proper taxable year the amount specified