What Are The Consequences Of A Stock Dividend Under Section 1202?

A stock dividend involves the distribution by a corporation of shares to existing shareholders with respect to their outstanding shares. Section 305(a) generally provides that a distribution made by a corporation to its shareholders in its stock is nontaxable. As discussed elsewhere in this Article, Section 1202(h)(3) provides that rules similar to those in Section 1244(d)(2) apply to Section 1202. Treasury Regulation Section 1.1244(d)-3 provides that stock dividends generally fall within the scope of Section 1244(d)(2). Under the authority of Section 1202(h)(3), a dividend of stock with respect to outstanding QSBS should also qualify as QSBS. As discussed in more detail in Section G above, there are arguments based on the language of Section 1244 and Treasury Regulation Section 1.1244(d)-3 that the corporation should not be required to satisfy the $50 Million Test a second time when the stock dividend is made. The only Section 1202 eligibility requirements that should be applicable at the time of the stock dividend would be those ongoing Section 1202 eligibility requirements that would need to be satisfied for the original stock to maintain its QSBS qualification (e.g., the continuing use of at least 80% of the corporation’s assets [by value] in the active conduct of a qualified business activity).

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