Taxability of Stock Dividends

August 1, 1967 BIR RULING NO. 027-67 Mr. H. Villarica Villarica Finance Company Philamlife Bldg., Jones Ave. Cebu City S i r : This refers to your letter dated January 5, 1966 requesting information on a query stated as follows, to wit: casia "If a stockholder sells the stock dividends he get within one year and his accounting method of computation is based on the identification basis, does he have to pay full on the gross sale of the stock, since there was no cost, and also since it was sold within a year's time from the time of issue?" In reply thereto, I have the honor to inform you that stock dividends are either taxable or non-taxable. A dividend in stock is taxable unless it worked no change in the corporate entity, the same interest in the same corporation being represented after the distribution by more shares of precisely the same character. (Mertens, Federal Income Taxation, Vol. 1, S. 9.91, p. 145). Where the proportionate interests of the stockholders are changed, dividends thus received are taxable as ordinary income in the year paid or accrued. (Ibid. Vol. 1, S. 9.91, p. 146). For the purpose of taxation, stock dividend is "capital", whether the stockholder taxes it in his own right or for the benefit of another. (Words and Phrases, Vol. 6, p. 77, citing Equitable Trust Co. of N. Y. v. Prentice, 164 N. E. 723, 725, 250 N.Y. I. 63 A. L. R. 263). In case the recipient sells a non-taxable stock dividend, the date basis for determining the holding period for capital gains and loss purposes is the date basis of the old shares. In other words, the holding period of non-taxable stock dividends should be taxed to the holding period of the original and regular shares of stock. (Federal Taxes, Vol. 2, Prentice-Hall, pp. 9360-9361) Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue