Only dividends paid out of the relevant year net income or any accumulated earnings available since acquisition of the block of stock are recognized as ordinary dividend and the rest are recognized as liquidating dividends.Sharon owns 1,000 shares in the Tablet Universe Company and the company just announced that it is paying a liquidating dividend.
While conventional dividends are recorded by the investor as an income from its investment, liquidating dividends are recorded not as an income but as return of the investment.
Each blocks of shares acquired must be treated separately and accumulated earnings since the acquisition should be considered only in determining whether a dividend is an ordinary dividend or a liquidating dividend.
Companies pay liquidating dividends from their capital base or the amount contributed by shareholders and not their retained earnings.
A company could pay liquidating dividends if it attempts to sell the company but the market does not place a favorable value on it.
Because liquidating dividends are effectively repayment of investment, they typically do not have the same tax implications as ordinary dividends.