Constructive Dividends
Siu Kei Cheng(Andy)
Siu Kei Cheng(Andy)
Constructive Dividends
In Ltr. Rul 20028806, the shareholders of a corporation owned, managed, and operated country club were given discounts for the use of the club’s facilities. The club was located in a community where both non shareholders and shareholders resided. Shareholders received discounts on membership dues as well as other incentives inside the club. Taxpayer requested a letter ruling on whether or not the discounts received constitute as constructive dividends received. The IRS indeed ruled the discounts received by the taxpayer constituted as constructive dividends under section 316 and the distribution applied to section 301. A constructive dividend is a
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It can either be a direct or an indirect form of payment and mostly occurs in closely held corporations. These payments can also be distributed both advertently and inadvertently. Some of the most common types of constructive dividends revolve around personal use of corporation’s property, personal expenses of shareholder paid by corporation, unreasonable rental payments, unreasonable compensations, and other types of shareholder withdrawals. Their main purpose is to avoid reporting dividend income. In later paragraphs, we will discuss various cases where corporations purposely avoid reporting dividend income. Why do corporations distribute constructive dividends? What are the motives behind distributing other form of payments to shareholders other than distributing regular dividends? “Tax savings” is the answer to the above questions. Dividends are subject to “double taxation” where the distributions are taxed at both the corporate and individual taxpayer (shareholder) level. By distributing payments in other forms, the taxpayers and …show more content…
Often times these shareholder(s) serve as the corporation’s board of directors, management, and are in full control of the corporation’s day to day operations. Closely held corporation are usually not well structured and lack formalities, creating opportunities for shareholders to divert income and constructing other forms of constructive dividends for their own sole benefits. The federal court case of Truesdell v. Commissioner, 89 TC 1280, Code Sec(s)61 is an example of income diversion within a closely held corporation. James Truesdell, who solely owned both the company Asphalt Patch and Jim T. Enterprise (incorporated by his son who was 17 at the time), is found to have diverted funds from his solely owned corporations to his own bank account in the year 1977, 1978, and 1979. The diverted funds was neither reported on his tax return nor reported as income on both corporations. Because James controlled much of both company’s activities, he was able to manipulate books and records to avoid the attention of the corporation’s accountant and bookkeepers. Some of the tactics that were used involves unnumbered bills, invoices, and estimates. In conclusion of the case, the income diverted by James Trusdell was found to be constructive dividends. The Truesdell case is a great example of
A very slim minority of firms distribute dividends. This truism has revolutionary implications. In the absence of dividends, the foundation of most - if not all - of the financial theories we employ in order to determine the value of shares, is falsified. These theories rely on a few implicit and explicit assumptions:
...would result in non-recognition of compensation expense, thus misrepresenting the costs of operating the business. The accounting for the modification of the share-based payments provides feedback value to investors. By making the change in compensation expense, this alerts investors that there has been a modification to the terms of the share based payments. By alerting the investors of the change, this is telling investors that management believes the company will still be successful, however management wishes to induce employees to continue work hard to help raise the share price. Lastly, as the 12/31/06 journal entry shows, the offsetting debit is to additional paid in capital-share-based payments. The provides predictive value to investors because investors will know the amount of cash inflows to expect from future exercise of the share-based payment awards.
A company’s dividend policy is a major driver behind investors’ willingness to buy into the company. When a company has a consistent dividend policy, investors are more likely to want to invest in a company. This is the case when considering Team Baldwin. The dividends that were paid out were $1.75, $2.75, and $4.00. Andrews’ dividends were $5.66, $0, and $2.08. Baldwin’s consistently increasing dividends were very attractive to shareholders which helped to boost stock price. The fluctuating and sometimes nonexistent dividends of Team Andrews was a contributing factor of why their stock price declined each
In this assignment I will discuss in depth how different dividends policies could affect Mullin plc future prospects, in accordance with the payment or non payment of dividends. Using an analytical approach I will evaluate the dividend policy options available to Mullin plc. I will be primarily focusing on three dividend theories; irrelevant theory, bird in hand theory and Tax preference theory sometimes referred to as clientele theory. Although these theories will be my main focus I may briefly discuss other theories that I feel are relevant to this assignment.
Linear Technology supplies products across various industries, allowing them sustain a vast amount of customers (Appendix 1). In terms of their financials, Linear went public on the NASDAQ in 1986. Shortly after their company announced its IPO, Paul Coghlan was announced as the company’s CFO. Linear has shown good performance with stable margins and strong growth. However during 2002 a decline in demand for its products hurt Linear’s net income and sales, forcing them to change their fixed to variable cost ratio by re-structuring their compensation strategy and rewarding their employees through profit sharing (stock options). There are various issues that we managed to identify in this case. Historically Linear has been increasing its dividend at a steady rate of $0.01 per year. In this case, Paul Coghlan faces the issue of whether Liner should continue to increase its dividend and issue a special dividend for this quarter (2003 Q2) based on their weak financials in 2003. We identified a variety of factors that might induce Mr. Coghlan to change Linear’s dividend policy in appendix 2.
The perceived benefits of dividends are not seen as much than before, other reasons like lower transactions costs for selling tocks, governance techniques to reduce the reliance on dividends as a means of corporate discipline, and clientele effect that some stockholders prefer capital gain over
Dividends is used often with the stock market, dividends are profit you receive when the company makes a profit. If the company does not make a profit, you will not receive a dividend reimbursement. Payments can be reinvested, which helps build wealth because you are increasing your portfolio. You can also so use this cash for whatever you like.
How to determine the most appropriate dividend policy has become one of the hottest topics in recent years as dividend decisions continue to have a significant impact on both investment and finance decisions (company’s performance overall), affecting financial managers considerations when deciding how much earnings to reinvest and how much to be paid to shareholders (Watson and Head, 2010). There are already many theories either supporting or criticising the impact of dividend decisions on a firm’s value. Litner (1956) indicated that dividends are paid by mature companies who have positive earnings instead of smaller firms and managers always target a long-term dividend payout that can be sustained. This essay will critically evaluate dividend policies relating to appropriate theories by using Vodafone as a primary example; and discuss the possible reasons why the company announced a £1.5bn share buyback program in 2012.
This includes but is not limited to; check forgery, inventory theft, cash or check theft, payroll fraud or service theft. Another example of misappropriation of assets is when a company pays for goods or services that were not received or used. Embezzlement is a very common form of misappropriation where companies manipulate their accounts or create false invoices. An example of misappropriation of assets was discovered in 2008 and the victim organization was Fry’s Electronics. The Vice President of Merchandising and Operations, Ausaf Umar Siddiqui had set up a fake company that received illegal kickbacks. Siddiqui embezzled $65.6 million to pay off his gambling debts. Embezzlement of money from a company can understate cash and show a false picture to the creditors and investors. This can lead them to make decisions on misrepresented information. Another example of misappropriation of assets was of a hedge-fund manager, Philip A. Falcone who borrowed $113.2 million from investors from a hedge fund company (Harbinger Capital) and he used that money fraudulently to pay off his personal taxes. Instead of using the investor’s money for the intended purpose, which was to build a wireless phone network, he deceived them by using the money without their knowledge to pay off his taxes. The company had to file for bankruptcy as it had $23 billion in losses and withdrawals and it could not pay back
This case involved two minority shareholders initiating legal proceedings against the directors of the company, on behalf of all shareholders, claiming that the company’s assets had been fraudulently misappropriated by the directors and seeking compensation for losses.48 The action did not lie at the suit of shareholders. The injury was to the company as a whole, not to the plaintiffs exclusively. There is no general right for any individual members of a corporation to assure to themselves the right of suing in the name of the corporation. In law, the corporation and the In dismissing the claim, the Court established two important rules that effectively barred minority shareholders from initiating proceedings where the alleged misconduct was capable of being ratified by the majority of
Firstly, it will be recorded as short-term liabilities they pay the final dividend. Assuming they pay the final dividend using cash, it will reduce the bank balance from current assets and will also reduce the retained profits that are recorded under Equity in the Statement of Financial Position.
An important element of the special equity established in Yerkey v Jones is that there is no physical benefit to the wife from the transaction. In Garcia v National Australia Bank Ltd in applying the equitable principle, the trial judge found Mrs Garcia as a volunteer who, despite being the director and shareholder of her husbands company, had nothing to gain directly or even indirectly from the transaction she guaranteed. In application of the special equity Mrs Garcia gained no real financial benefit from entering into the transaction and that any benefit for Mrs Garcia to gain as a guarantor would depend on remaining on good relations...
Corporate law is an area of law that directly relates to dealings with corporations within our legal system. “In Ontario, law compromises of statutes, regulations and cases. This means that to understand the law in any area, you must familiarize yourself with the statute or statutes that relate to that area, check related regulations where required, and read cases that show you how the courts have applied those statutes and regulations in real life situations” (Corporate Law for Ontario Businesses, 2012, pg. 2). In this paper I will be doing just that. I am going to be looking at a particular case that happened and examine how the courts applied legal regulations to a real life situation. I will also be examining what it means for a corporation to be a separate legal entity, as well as the level of importance a shareholder has within a company. All of these topics directly relate to the case I will be examining and are important to knowing in order to understand why the court made the decision that they did. Lastly, I will be discussing my own personal opinions on the case and the decision made by the courts.
Dividends are the distribution of profits in the company. It depends on the type of dividend policy made by companies. Dividend policy will affect the behaviours and attitudes of investors towards the company. Many economists or financial experts have constructed different theories to interpret the effects of a dividend policy to the society. But these theories are contestable since they are not tested in the real world. Managers’ decision on determining the size and time of a company’s next dividend payment is also important for both companies and shareholders. They will affect the company to distribute an appropriate amount of dividends in a right time. This essay will discuss whether theories of dividend payment, such as the dividend irrelevance and signalling effects are applicable in the real world. It will then describe some key factors that managers should consider on deciding the time and size of a company’s next dividend payment. Finally, it will conclude with the significance of a company’s decision on dividend payments.
Most of preference share issued by company are cumulative preference share, which means that all the arrear of dividend must be paid to preference share holder before paying any dividend to equity shareholders. This is company liabilities to pay arrear of dividend which increase financial burden of company.