Vanderbilt Law Review


John A. Pickens

First Page



Federal income taxation of stock dividends has followed a diverse course. Since the introduction of a federal income tax on all stock dividends in 1916, five major changes have occurred in this area. The most recent of these changes is embodied in section 421 of the Tax Reform Act of 1969, which amends section 305 of the Internal Revenue Code of 1954. When the 1969 Amendments are compared with the treatment of stock dividends under the Internal Revenue Code of 1954, they can be viewed, in conjunction with the regulations issued in 1969 under the 1954 Code, as initiating a new era in the taxation of stock dividends. Generally, the 1969 Amendments expand considerably the scope of stock dividend taxation, and they reinstate the "proportionate interest" test of stock dividend taxation, which was utilized by the courts with great confusion prior to the enactment of the 1954 Code. Further,the 1969 Amendments grant the Secretary of the Treasury broad power to promulgate regulations under the new provisions. Although the proposed regulations clarify to some extent the application of the new code sections, many problems will undoubtedly still arise. The sweeping nature of the 1969 Amendments, for example, raises numerous questions about the constitutionality of the taxation of certain stock dividends. Moreover, the application of the "proportionate interest" test probably will revive the troublesome problems encountered in the prior use of the test. Since stock dividends have become an increasingly important tool of corporate financial policy, which affects millions of shareholders the validity of the 1969 Amendments will probably be tested in the courts. This Note, therefore, undertakes to delineate the effects of the 1969 Amendments on shareholders and corporations and to present several arguments that may be used to challenge the constitutionality of this new scheme of stock dividend taxation.' In order to properly analyze the impact of the 1969 Amendments, a thorough familiarity with the history of stock dividend taxation and the 1969 provisions is essential.