THE "DEEP STRUCTURE" OF THE DIVIDEND EXCEPTION

• Published in: Corporate Taxation Vol. 50; no. 3; pp. 43 - 48
• Main Author: Rizz, Robert
• Format: Trade Publication Article
• Language: English
• Published: New York, N.Y Thomson Reuters (Tax & Accounting) Inc 01.05.2023
• Subjects: Capital gains; Dividend distributions; Excise taxes; Fair market value; Securities buybacks; Stockholders; Taxpayers; Treasuries
• ISSN: 1534-715X

[...]the Notice provides a method for evaluating a corporate taxpayer's position that a particular repurchase by the taxpayer is a dividend for purposes of the exception - as opposed to a redemption treated as a sale or exchange under Section 302(a) and therefore subject to the stock repurchase tax - by creating a "rebuttable presumption" that the transaction is not a dividend and is therefore not within the dividend exception. Even in the case of an entirely pro rata redemption of a single class of stock, which would usually be the hallmark of dividend treatment,15 obtaining the necessary "certification" from hundreds or thousands of distributee shareholders (since Section 4501 applies to public corporations) may not be practical.16 Nonetheless, the scope of the dividend carve-out from the stock repurchase tax will be an important issue for many such transactions.17 Form issues for "dividends" The question of what is a "dividend" and how should dividends be taxed has been a practical and theoretical issue for decades.18 In the mid- 1970s, for example, leading corporate tax practitioners engaged in a spirited debate on the question.19 Distinctions between redemptions treated as sales or exchanges and distributions treated as dividends out of earnings and profits were the subject of conflicting cases long before then.20 In general, the IRS generally pushed for dividend treatment, while individual taxpayers sought capital gain outcomes, although litigation incentives sometimes flipped when the distribution was to a corporate shareholder eligible for the dividends-received deduction under Section 243. [...]the nature of dividends, and whether they represent income to the shareholders in the sense of bestowing an economic benefit (or otherwise an accretion to wealth as one measure of income for tax purposes) has long been debated. [...]the analysis of dividends in one of the early articles posed the issue as follows: A dividend does not confer an economic benefit on its recipient. In substance, Pan-Atlantic neither declared nor paid a dividend to Waterman, but rather acted as a mere conduit for the payment of the purchase price to Waterman. [...]the distribution of the promissory notes was not respected as a dividend to Waterman Steamship but was instead treated as part of the payment of purchase price from the buyer.