[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.565-3]

[Page 307]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.565-3  Effect of consent.

    (a) General Rule. The amount of the consent dividend that is 
described in paragraph (a) of Sec. 1.565-1 shall be considered, for all 
purposes of the Code, as if it were distributed in money by the 
corporation to the shareholder on the last day of the taxable year of 
the corporation, received by the shareholder on such day, and 
immediately contributed by the shareholder as paid-in capital to 
thecorporation on such day. Thus, the amount of the consent dividend 
will be treated by the shareholder as a dividend. The shareholder will 
be entitled to the dividends received deduction under section 243 or 245 
with respect to such consent dividend. The basis of the shareholder's 
consent stock in a corporation will be increased by the amount thus 
treated in his hands as a dividend which he is considered as having 
contributed to the corporation as paid-in capital. The amount of the 
current dividend will also be treated as a dividend received from 
sources within the United States in the same manner as if the dividend 
had been paid in money to the shareholders. Among other effects of the 
consent dividend, the earnings and profits of the corporation will be 
decreased by the amount of the consent dividends. Moreover, if the 
shareholder is a corporation, its accumulated earnings and profits will 
be increased by the amount of the consent dividend with respect to which 
it makes a consent.
    (b) Example. The application of section 565 (c) may be illustrated 
by the following example:

    Example. Corporation A, a personal holding company and a calendar 
year taxpayer, has one shareholder, individual B, whose consent to 
include $10,000 in his gross income for the calendar year 1987 has been 
timely filed. A has $8,000 of earnings and profits at the beginning of 
1987. A has $10,000 of undistributed personal holding company income 
(determined without regard to distributions under section 316(b)(2)) for 
1987. B must include $10,000 in his gross income as a taxable income and 
is treated as having immediately contributed $10,000 to A as paid-in 
capital. See section 316(b)(2).

[T.D. 8244, 54 FR 10540, Mar. 14, 1989]