Taxation - Federal Income Tax - Extent to Which A Dividend in Kind is Ordinary Income Under the Internal Revenue Code

Taxpayer, a corporate shareholder, received from the corporation a distribution of property which had appreciated in value over its adjusted cost. The earnings and profits of the corporation were sufficient to cover the adjusted cost of the property distributed, but were not sufficient to cover its full fair market value at the time of distribution. The Tax Court held that the fair market value of the distribution was taxable as a dividend only to the extent of the corporation's earnings and profits. On appeal, held, reversed.

In determining whether a distribution in kind is a dividend under section 115(a), the earnings and profits of the corporation are to be charged with the adjusted basis of the property distributed, without regard to any unrealized appreciation in its value. Since the corporation's earnings and profits were sufficient to cover the adjusted cost of the property herein distributed, the entire distribution is a dividend, and is taxable, under section 115(j), to the full extent of its fair market value at the time of distribution. Commissioner v. Hirshon Trust, (2d Cir. 1954) 213 F. (2d) 523; Commissioner v. Godley's Estate, (3d Cir.

1954) 213 F. (2d) 529.