Dividends received deduction denied for forward conversions.For a corporate taxpayer to enjoy a dividends received deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. (DRD DRD Dopa-Responsive Dystonia DRD Dividends Received Deduction DRD Drag Rescue Device (firefighter bunker) DRD Deputy Regional Director DRD Data Requirements Document DRD Direct Reading Dosimeter DRD Department of Redundancy Department ), the stock on which the dividend is paid must be held for more than 45 days. This holding period is reduced for any period during which the taxpayer has an option to sell the stock or substantially identical stock. In Progressive Corp. v. United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , the district court ruled a taxpayer that entered into a "forward conversion" (that is, the purchase of stock, purchase of a put and sale of a call ) was nevertheless eligible for a DRD. The court's view was based on its interpretation of a regulation that seemingly seem·ing adj. Apparent; ostensible. n. Outward appearance; semblance. seem  ing·ly adv. required a taxpayer to be short the underlying stock (that is, sell borrowed stock) in order for the holding period to be tolled. Predictably, the Sixth Circuit Court of Appeals reversed the lower court's holding (in a July 22, 1992 decision). It said the statute requiring a reduction in the holding period for days on which the investor owns a put is unambiguous, and the district court's construction of the regulations ignored the plain language of the statute, which does not require (or even use the phrase) a short position. Moreover, the lower court's interpretation of the regulation was internally inconsistent, viewing the holding period as reduced only if the taxpayer is short the stock. If, however, the taxpayer does not own the stock, it will not, by definition, receive any dividends to which the DRD might apply. Progressive also executed trades in which it bought stock and sold a call with an exercise price substantially below the value of the stock (a "deep-in-the-money" call). In accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with revenue ruling 80238, the Internal Revenue Service claimed Progressive earned no holding period for this stock because, in substance, such a call is the equivalent of an obligation to sell the underlying stock. Observation: The Sixth Circuit seemed sympathetic to the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. but ultimately remanded the case to the lower court to restore the question of whether Progressive was entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: to a dividends received deduction. The lower court is expected to side with the IRS. |
|
||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion