Millions of people receive taxable dividends, including many senior citizens.

But if it collected taxable dividends, it would get no tax breaks on the income.

Ms. Olson said any company that paid some taxable dividends and some nontaxable would have to do so for all its shareholders.

A corporate buyer of Texaco shares today at $50 would be able to avoid extraordinary-dividend status if taxable dividends are less than $5 over any 85-day period.

For United States investors, however, the distribution of Nortel shares will be treated as a taxable dividend, the Montreal-based BCE said yesterday.

"I can't imagine that there's ever going to be a taxable dividend or capital gain or anything else if we do this and the president's other proposal," Mr. Gale said.

So an investor might find some interest was not deductible if total taxable investment income - basically interest, taxable dividends and capital gains - was not high enough.

Under its spinoff plan, American Cyanamid will distribute all of Cytec's outstanding common shares as a taxable dividend to American Cyanamid shareholders.

A New Henley Group Henley's shareholders would also receive, as a partly taxable dividend, all the shares in a new Henley Group.

Here's how it might work: If a company had the right to pay $65 million in taxable dividends, and paid just that amount in cash dividends, all the dividends would be tax exempt.

The decision is important, because the tax-deferred retirement plans cater much more to ordinary salaried employees, while the great bulk of taxable dividend income currently goes to a small segment of the population.

Teresa Heinz Kerry released her 2003 tax returns last week, which revealed that she paid $587,000 in taxes last year on income of more than $5 million, mostly from taxable dividends and interest and tax-exempt bonds.

Since the bulk of taxable dividends are received by a small segment of wealthy families, analysts estimate that about 42 percent of the tax benefit from that move alone would flow to the top 1 percent of taxpayers.

An investor who finds that part of his dividend income is taxable, as a result of applying Section 246A, would have the advantage of having that taxable dividend count as investment income, increasing the investment interest that could be deducted.

But the president also heard a polite but blunt denunciation of the biggest element of his plan, the proposal to end the taxation of stock dividends, from Donald Lucas, a retired accountant who the White House said receives $3,000 to $4,000 a year in taxable dividend income.

But the company said that for the family to be assured that the payouts it received would be classified not as fully taxable dividends but as capital gains, on which a smaller tax would be owed, it was necessary for the family to reduce its collective stake by at least one-fifth.