Question

How are transfers and distributions taxed differently?

Answer 1

Distribution of dividend in cash attracts double taxation . Asper US taxation law, before distributing dividend to the stockholder out of its income, a company has to pay tax to the government. Thus, simply we can conclude dividend payment to the stockholder is not a tax deductible expense in the hand of company unlike interest on bonds. On the other hand any dividend received by the stockholder forms part of the personal income of the individual and is taxable for him as per the tax applicable to his income.

On the other hand in case of transfer of any asset by the company to it's stockholder, it is again a non tax deductible expense in the hands of company whereas when it comes to the stockholder tax liability arises only when that individual sell that particular asset as capital gain and the cost of the asset for that purpose will be fmv of the asset as on the date of receipt of that asset.

In this way tax treatment of transfer and distribution differs.