2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 17 - Internal Revenue Code of 2011 (§§ 30001 — 33423) › PART II - Income Taxes (§§ 30041 — 30622) › Chapter 1005 - Computation of Taxable Income (§§ 30101 — 30157) › Subchapter D - Determination of Capital Gains and Losses (§§ 30141 — 30149) › § 30149 - Distributions to corporations

(a) Dividend defined.—
(1) For purposes of this part (except insurance company dividends paid to policy holders), the term “dividend” means any distribution of property made by a corporation to its shareholders whether it is money or property,
(A) out of its earnings or profits accumulated after February 28, 1913, or
(B) out of its earnings or 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.
(2) The amount of the distribution in other property which qualifies as a dividend shall not exceed the earnings or profits of the corporation, without regard to the amount of the basis of the property in the hands of the corporation. To determine the amount of a distribution refer to subsection (j) of this section.
(b) Origin of distributions.—
(1) In general.— For purposes of this part, any distribution is made out of earnings and profits to the extent thereof, and out of the most recently accumulated earnings and profits. Any accumulated earnings or profits or increase in the value of the property accumulated before March 1, 1913 may be distributed exempt from tax after the accumulated earnings and profits after February 28, 1913 have been distributed, however any of such exempt distributions shall be applied against or shall reduce the adjusted basis of the stock as established in § 30142 of this title.
(2) Special rule for industrial development income distributions.— The distribution of industrial development income shall be deemed to be made pursuant to the provisions of § 10643(d) of this title, or any applicable provision of any previous or subsequent similar law, except that for purposes of this part, the distributions of such income shall be deemed made pursuant to the provisions of § 30431(a)(2)(E) of this title.
(c) Distributions in liquidation.— The amounts distributed in a total liquidation of a corporation shall be treated as full payment in exchange for stock, and the amounts distributed in a partial liquidation of a corporation shall be treated as a partial or full payment in exchange for stock. The distribuee’s gain or loss resulting from such exchange shall be determined under § 30143 of this title, however, it shall be recognized only to the extent established in § 30144 of this title. In the case of amounts distributed whether before January 1, 1954, or on or after such date, in a partial liquidation (other than a distribution to which the provisions of subsection (h) shall apply), the portion of such distribution that is duly attributable to the earnings and profits shall be an amount not exceeding the ratable amount of earnings and profits accumulated after February 28, 1913 that are attributable to the stock cancelled or redeemed in the partial liquidation.
(d) Other capital distributions.— If any distribution made by a corporation to its shareholders does not originate from the increase accrued in the value of a property, accumulated before March 1, 1913, and were not a dividend, then the amount of such distribution shall be applied against and reduce the adjusted basis of stock set forth in § 30142 of this title, and if it were in excess of such basis, such excess shall be attributable in the same manner that a gain in a sale or transfer of property. This subsection shall not apply to a liquidation in partial or total distribution, or a distribution that, under subsection (f)(1), were not treated as a dividend, whether or not it was a dividend.
(e) Distributions in redemption of stock to pay estate tax.—
(1) General rule.— A distribution of property to a shareholder by a corporation in redemption of part or all of the stock of such corporation which (for estate tax purposes) is included in determining the gross estate of the decedent, to the extent that the amount of such distribution does not exceed the sum of:
(A) The estate tax (including any interest collected as par of such taxes) imposed because of the decedent’s death, and
(B) the amount of funeral and administration expenses allowable as deductions to the estate under § 31033 of this title (or under § 31066 of this title, in the case of the estate of a decedent nonresident of Puerto Rico), shall be treated as a distribution in full payment in exchange for the stock so redeemed.
(2) Limitations on application of clause (1).—
(A) Period for distribution.— Clause (1) shall apply only to the amounts distributed after the death of the decedent, and
(i) Within the period of limitations established in § 33005(a) of this title for estate tax assessment (determined without the application of any other provision other that § 33005(a) of this title) or within ninety (90) days after the expiration of such period, or
(ii) if a petition for redetermination of a deficiency in such estate tax has been filed with the Court of First Instance within the time prescribed in § 33002 of this title any time before the expiration of sixty (60) days after the decision of the Court of First Instance becomes final, or
(iii) if an election for extension has been made for the payment of the tax under § 31129 of this title, and if the time prescribed by this subparagraph expires at a later date than the time prescribed by subparagraph (ii), within the time determined under § 31129 of this title for the payment of the tax.
(B) Relation of stock to the decedent’s estate.—
(i) In general.— Clause (1) shall apply to a distribution by a corporation only if the value (for purposes of the tax imposed in §§ 31001 et seq. of this title) of all of the stock of such corporation which is included in determining the value of the decedent’s gross estate exceeds thirty-five percent (35%) of the excess of the value of the gross estate of the decedent, over the sum of the amounts allowable as a deduction under §§ 31033 and 31036 of this title.
(ii) Special rule for stock of two or more corporations.— For purposes of subparagraph (i), stock of two or more corporations, with respect to each of which there is included in determining the value of the decedent’s gross estate more than twenty percent (20%) in value of the outstanding stock, shall be treated as the stock of a single corporation. For purposes of the twenty percent (20%) requirement of the preceding sentence, stock which, at the decedent’s death, represents the surviving spouse’s interest in property held by the decedent and the surviving spouse as community property shall be treated as having been included in determining the value of the decedent’s gross estate.
(C) Relationship of shareholder to estate tax.— Clause (1) shall apply to a distribution by a corporation only to the extent that the interest of the shareholder is reduced directly (or through a binding obligation to contribute) by any payment of an amount described in paragraph (A) or (B) of clause (1).
(D) Additional requirements for distributions made more than four (4) years after decedent’s death.— In the case of amounts distributed more than four (4) years after the date of the decedent’s death, clause (1) shall apply to a distribution by a corporation only to the extent of the lesser of:
(i) The aggregate of the amounts referred to in paragraph (A) or (B) of clause (1) which remained unpaid immediately before the distribution, or
(ii) the aggregate of the amounts referred to in paragraph (A) or (B) of clause (1) which are paid during the one (1)-year period beginning on the date of such distribution.
(f) Dividends in stock.—
(1) General rule.— A distribution made by a corporation to its shareholders in capital stock or rights to acquire capital stock shall not be treated as a dividend to the extent it does not constitute income for the shareholder within the meaning of the Sixteenth Amendment of the Constitution of the United States.
(2) Shareholders’ form of payment election.— If a distribution by a corporation is, by election from any of its shareholders, made before or after the filing thereof, payable:
(A) In capital stock or rights to acquire capital stock of a class that, if distributed without election, shall be tax exempt under clause (1), or
(B) in money or any other property (including capital stock or rights to acquire stock that if distributed without election shall not be tax exempt under clause (1)).
Then, the distribution shall constitute a taxable dividend held by any and all shareholders regardless of the form of payment.
(g) Redemption of stock.— If a corporation cancels or redeems its stock (whether or not such stocks were issued as a stock dividend) in such time and manner as to make all or part of the distribution and the cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent that such distribution represents a distribution of earnings or profits accumulated after February 28, 1913.
(h) Effect of the distribution in stock on earnings and profits.— The distribution, if it were made before, on or after January 1, 1954, to a distribute by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation or of property, or money, shall not be considered a distribution of the earnings and profits of any corporation:
(1) If no gain to such distributee from the receipt of such stock or securities, property or money, was recognized under this part, or
(2) if the distribution was not subject to tax in the hands of such distributee because the same did not constitute income for the distributee within the meaning of the Sixteenth Amendment of the Constitution of the United States or because it was exempt under subsection (f) or under any appropriate provision of a previous income tax law.
As used in this subsection, the term “stock and securities” includes rights to acquire stock and securities.
(i) Partial liquidation defined.— As used in this section, the term “amounts distributed in partial liquidation” means a distribution by a corporation in total cancellation or redemption of a part of its stock or one of a series of distributions in complete cancellation or redemption of all or one part of its stock.
(j) Assessment of distributions.— For purposes of this section, the amount of any distribution shall be the sum of the money received with the fair market value on the date of the distribution of any other property received. The fair market value of any other property received shall be reduced by any debt or obligation of the corporation assumed by the shareholder with respect to such distribution.
(k) Effect on earnings and profits of gain or loss and of receipt of tax-free distributions.—
(1) The gain or loss realized from the sale or other disposition (after February 28, 1913) of property by a corporation:
(A) For the purpose of the computation of the earnings and profits of the corporation, shall, except as provided in paragraph (B) be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913, but
(B) for purposes of the computation of the earnings and profits of the corporation for any period beginning after February 28, 1913, shall be determined by using the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain.
(2) Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing taxable income under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis used in computing such realized gain or loss, the adjustment to the basis differs from the adjustment proper for the purpose of determining earnings and profits, then the latter adjustment shall be used in determining the increase or decrease above provided.
(3) For purposes of this subsection, a loss with respect to which a deduction is disallowed under § 30147 of this title or the corresponding provision of prior income tax act, shall not be deemed to be recognized.
(4) Where a corporation receives (after February 28, 1913) a distribution from a second corporation which under the law applicable to the year in which the distribution was made was not a taxable dividend to the shareholders of the second corporation, the amount of such distribution shall not increase the earnings and profits of the first corporation in the following cases:
(A) No such increase shall be made in respect of the part of such distribution which under such law is directly applied in reduction of the basis of the stock in respect of which the distribution was made, and
(B) no such increase shall be made if under such law the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between the stock and the property received.
(l) Earnings and profits.— Increase in value accrued before March 1, 1913:
(1) If any increase or decrease in the earnings and profits for any period beginning after February 28, 1913, with respect to any matter would be different had the adjusted basis of the property involved been determined without regard to its March 1, 1913, value, then, except as provided in clause (2), an increase properly reflecting such difference shall be made in that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.
(2) If the application of subsection (k) to a sale or other disposition after February 28, 1913, results in a loss which is to be applied in decrease of earnings and profits for any period beginning after February 28, 1913, then, notwithstanding subsection (k) and in lieu of the rule provided in clause (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the property used in determining the loss exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913, and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss shall increase that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.
(m) Earnings and profits.—Depreciation adjustment.— Regarding any depreciation adjustment, computing of the earnings and profits of a corporation shall be made only with respect to the straight line method of depreciation established in § 30127 of this title, and regardless of any election by, or deduction of flexible depreciation under § 30181 of this title, or accelerated depreciation under § 30182 of this title, or special deduction prescribed by §§ 10641 et seq. of this title, known as the “Economic Incentives Act for the Development of Puerto Rico”, and any prior or subsequent similar law, or the use of any accelerated depreciation method or exception to the credit of capital accounts allowed by special fiscal incentive laws.
(n) Effect on earnings and profits in distributions of money or other property.—
(1) General rule.— A corporation that makes a distribution of money or other property shall reduce its earnings and profits (to the available extent thereof) by the sum of the distributed money and the adjusted basis of other distributed property (or its fair market value if clause (2) applies).
(2) Distribution of appreciated property.— A corporation that makes a distribution of property subject to § 30144(p) of this title, shall increase its earnings and profits by the amount of the gain recognized under such section.
(o) Redemption through use of related corporations.—
(1) Acquisition by related corporation (other than a subsidiary).— For purposes of subsections (c), (e) and (g), if:
(A) One (1) or more persons are in control, as defined in § 30144(h)(2) of this title, of each of the two (2) corporations, and
(B) in return for property, one of the corporations acquires stock in the other corporation from the person or persons described in paragraph (A), then, except as provided in clause (2), such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock.
(2) Acquisition by subsidiary.— For purposes of subsections (c) and (e), if:
(A) In return for property, one corporation acquires from a shareholder of another corporation stock in such other corporation, and
(B) the issuing corporation controls, as defined in § 30144(h)(2) of this title, the acquiring corporation, then such property shall be treated as a distribution in redemption of the stock of the issuing corporation.
History —Jan. 31, 2011, No. 1, § 1034.09, retroactive to Jan. 1, 2011; Dec. 10, 2011, No. 232, § 43.