Opinion ID: 292838
Heading Depth: 2
Heading Rank: 1

Heading: Applicable Doctrine and Analysis of Basic Tax Concepts

Text: 56 Although the stockholder's receipt of a distribution of corporate assets reflecting unearned appreciation is not taxable as receipt of a dividend, that does not necessarily mean that the stockholder realizes no income, no gain or loss. 57 The correct analysis is aided, I think, by first approaching the situation without the special complications of a corporation in dissolution and a distribution of property in kind. 58 Suppose an on-going corporation makes a cash distribution that is not taxable as a dividend — because the corporation has no earnings. This is a commonplace, everyday occurrence in the case of a real estate corporation that has large accruals in depreciation reserves that result in losses in the financial statements, yet has large cash flow that it distributes to the stockholders. Such distributions, sometimes called non-taxable dividends in business circles, are not devoid of consequence under the D.C. tax law. Their proper significance is that they are a return of capital, which serves to reduce the basis of the shares held by the stockholder. If these non-taxable dividends reach an amount that exceeds the cost (or other tax basis) of the shareholder's stock, the difference constitutes taxable gross income, under 47 D.C.Code § 1557a 12 (1967), in my opinion, because he got back more than he invested. This income is fully taxed if within two years after a shareholder buys stock he receives distributions (other than taxable dividends) exceeding the cost of the stock. However, if his stock is a capital asset under the D.C.Code because it is not an item of inventory or stock in trade and it has been held by the stockholder for more than two years, 13 the amounts received thereon as return of capital are neither includible in gross income as gains 14 nor deductible from gross income as losses. 15 This is the holding in District of Columbia v. Goldman, 117 U.S.App. D.C. 219, 328 F.2d 520 (1963), a holding to which I would adhere. 16 59 The same tax consequences flow when the distribution by a corporation without earned surplus is not of cash but of property with a fair market value. 60 The same consequences likewise flow whether the distribution (in cash or property) is by a corporation that is on-going or in liquidation. As Berliner makes clear, the D.C.Code makes no distinction, for purposes of income tax liability of stockholder-distributees, between an ongoing or liquidating corporation.