[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: 26CFR1.565-6]

[Page 308]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.565-6  Definitions.

    (a) Consent stock. (1) The term consent stock includes what is 
generally known as common stock. It also includes participating 
preferred stock, the participation rights of which are unlimited.
    (2) The definition of consent stock may be illustrated by the 
following example:

    Example. If in the case of the X Corporation, a personal holding 
company, there is only one class of stock outstanding, it would all be 
consent stock. If, on the other hand, there were two classes of stock, 
class A and class B, and class A was entitled to 6 percent before any 
distribution could be made on class B, but class B was entitled to 
everything distributed after class A had received its 6 percent, only 
class B stock would be consent stock. Similarly, if class A, after 
receiving its 6 percent, was to participate equally or in some fixed 
proportion with class B until it had received a second 6 percent, after 
which class B alone was entitled to any further distributions, only 
class B stock would be consent stock. The same result would follow if 
the order of preferences were class A 6 percent, then class B 6 percent, 
then class A a second 6 percent, either alone or in conjunction with 
class B, then class B the remainder. If, however, class A stock is 
entitled to ultimate participation without limit as to amount, then it, 
too, may be consent stock. For example, if class A is to receive 3 
percent and then share equally or in some fixed proportion with class B 
in the remainder of the earnings or profits distributed, both class A 
stock and class B stock are consent stock.

    (b) Preferred dividends. (1) The term preferred dividends includes 
all fixed amounts (whether determined by percentage of par value, a 
stated return expressed in a certain number of dollars per share, or 
otherwise) the distribution of which on any class of stock is a 
condition precedent to a further distribution of earnings or profits 
(not including a distribution in partial or complete liquidation). A 
distribution, though expressed in terms of a fixed amount, is not a 
preferred dividend, however, unless it is preferred over a subsequent 
distribution within the taxable year upon some class or classes of stock 
other than one on which it is payable.
    (2) The definition of preferred dividends may be illustrated by the 
following example:

    Example. If, in the case of the X Corporation, there are only two 
classes of stock outstanding, class A and class B, and class A is 
entitled to a distribution of 6 percent of par, after which the balance 
of the earnings and profits are distributable on class B exclusively, 
class A's 6 percent is a preferred dividend. If the order of preferences 
is class A $6 per share, class B $6 per share, then class A and class B 
in fixed proportions until class A receives $3 more per share, then 
class B the remainder, all of class A's $9 per share and $6 per share of 
the amount distributable on class B are preferred dividends. The amount 
which class B is entitled to receive in conjunction with the payment to 
class A of its last $3 per share is not a preferred dividend, because 
the payment of such amount is preferred over no subsequent distribution 
except one made on class B itself. Finally, if a distribution must be $6 
on class A, $6 on class B, then on class A and class B share and share 
alike, the distribution on class A of $6 and the distribution on class B 
of $6 are both preferred dividends.

[54 FR 10540, Mar. 14, 1989]

                          BANKING INSTITUTIONS

          Rules of General Application to Banking Institutions