Property Dividend

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Property Dividend
See also


Property Dividend refers to an asset other than cash being distributed as the dividend. For example, the company may distribute inventory, fixed assets, or shares in another company that it holds. To declare a property dividend does not mean that a company does not have cash. A property dividend may be declared because the company is using its cash to finance an expansion or some other investment opportunity.

When a property dividend is declared, the company restates to fair value as of that date the property it will distribute and recognizes a gain or loss for the difference between the property's fair and carrying values[1].

Types of Dividend Payments

There are several types of dividend payments, including[2]:

  • Cash Dividends

Cash dividends are by far the most common type of dividend and will account for the vast majority of the dividend payments you receive. Cash dividends are simply a transfer of your share of a company's earnings to your brokerage account in the form of cash.

  • Stock Dividends

Issuing of new shares of stock to existing shareholders is known as stock dividends. For example, you own 10,000 shares and the company decided to pay a 5% stock dividend, you would receive 500 new shares of the company.

  • Property Dividends

Companies may issue non-monetary dividends to their shareholders. A property dividend could come in the form of physical assets such as inventories the company holds, or shares of a subsidiary company.

  • Scrip Dividends

A company may issue a scrip dividend when it does not have enough money to make dividend payments. A scrip dividend is a promissory note to pay shareholders a cash dividend in the future.

  • Liquidating Dividends

A liquidating dividend is a return of the capital that was originally contributed by shareholders. This type of dividend happened when a company is shutting down.

Property dividends- effect on the shareholder

When a corporation distributes property rather than cash to a shareholder, the amount distributed is measured by the fair market value of the property distribution. Ad with a cash distribution, the portion of a property distribution is a dividend, and any excess is treated as a return of capital. If the fair market value of the property distributed exceeds the corporation and the shareholder's basis in the stock investment, a capital gain usually results.

The amount distributed is reduced by any liabilities to which the distributed property is subject immediately before and immediately after the distribution and by any liabilities of the corporation assumed by the shareholder. The basis of the distributed property for the shareholders is the fair market value of the property on the date of this distribution[3].

Property dividends- effect on the corporation

All distributions of appreciated property generate gain to the distributing corporation. In effect, a corporation that distributes gain property is treated as if it had sold the property to the shareholder for its fair market value. However, the distributing corporation does not recognize loss on distributions of property.

If the distributed property is subject to a liability in excess of basis or the shareholder assumes such a liability, a special rule applies. For purposes of determining gain on the distribution, the fair market value of the property is treated as not being less than the amount the liability[4]

Footnotes

  1. M. Zain 2018, p.23-24
  2. A. Istomin 2018, p.150-152
  3. W. Hoffman, W. Raabe 2007, p.513-514
  4. J.E. Smith, W. A. Raabe 2014, p.311-312

References

Author: Emilia Trzeciecka