Capital Gains and Dividends

* Corporations incur taxes at the corporate level at marginal rates; while, distributions to shareholders are taxed at dividend rate

A corporation that distributes property that has appreciated in value must recognize a gain at the time of distribution. The corporation is treated as if it had sold the property. The gain equals the property 's fair market value less its adjusted basis. Code Sec. (b). However, the corporation does not recognize a loss if the property had declined in value. Also, the corporation recognizes no gain or loss if t distributes its own stock rights to its shareholders. Code Sec. (a). The character of the recognized gain depends on the property distributed; thus it may be ordinary income, capital gain, or Section 1231 gain.

Some of the colonists didn't want to be taxed with out thier consent, but it was such a small tax, why should it matter? The Patriots felt that they should be represented and shouldn't be taxed without being properly represented in Parliament. The Loyalists however, felt that they should be "loyal" to the King. It is only fair if the colonists pay for the war, fought to protect them.

Although the grantor trust rules generally address the taxability of trust income to the grantor, in some situations the Clifford trust doctrine has been extended to tax the income of a trust to someone other than the grantor. This happens when the powers granted enable a beneficiary to vest the corpus or income in the beneficiary. The seminal case of Mallinckrodt v. Nunan held that income of a trust was taxable to a beneficiary

When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends

PROFIT RETENTION – All losses and profits are shared equally, unless their agreement states otherwise.

The purpose of dividends-received deduction is to prevent triple taxation of earnings.   The Dividend Received Reduction (DRD) is the concept where a corporation receiving a dividend from another corporation does not have to pay taxes on that dividend they received.

The retained earnings general ledger account is adjusted every time a journal entry is made to an income or expense account

Company reduces tax paying by splitting the income through imputing dividends: Hobart Bridge Co Ltd v FCT .

In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

It has the option to distribute the cash in the form of dividends. Shareholders were taxed on cash dividends at ordinary income rates whereas gains realized on shares that were repurchased received capital gains treatment.

Because often dividends are perceived as spendable income (some stock holders look at stocks as a source of income as it is easier to get a dividend instead of selling the stocks). Sometimes investment opportunities are low, they reach the limit of their marketplace, so companies decides to distribute cash in the form of dividends. For some companies it is a way of showing that the company is stable financially and can fulfill the commitment of paying out a dividend. Also it is a way for companies to mitigate agency problems when they have excess cash.

The fact that shareholders are taxed twice through this repayment methodology infers that dividends are not their repayment technique of choice. Furthermore, paying out cash reserves through dividends also has the effect of both reducing the company’s assets and also inhibited the company’s ability to fund future growth as Dividends reduce the company’s retained earnings.

Dividends are subjected to higher tax rate compare to capital gain increased due to share buy-back. This discourages shareholders from desire to receive high dividends in place of higher capital gain as share values increase. A comparison is made below between the proposed capital structure and dividend policy.

A dividend is a usually distributed in cash form to stock holders of a corporation approved by the board of director. It may also include stock dividend or other forms of payment. A stock dividend represents a distribution of additional shares to common stockholders. Dividends are only cash payments regularly made by corporations to their stockholders.