Characterization and Assignment of Corporate and Shareholder Income

A fertile group for the development of differentials arises in dividend distributions made by corporations to their shareholders. Professor Schneider analyzes the way in which differentials in dividend income have been exploited: whose income it is; is it ordinary income or capital gain; and has a dividend been disguised as proceeds from the sale of stock, or a sales proceed as a dividend (the Waterman Steamship problem). He concludes that differentials between various types of statutes--who is the taxpayer, at what rate is the income taxed--inevitably leads to taxpayers trying to meet favorable characterizations and to avoid negative characterizations. The present method of taxing corporations and their shareholders separately, and at differing rates, involves several differentials.

As a consequence, the history of characterizing dividend income and assigning it to the appropriate taxpayer is a rich one.