Tax break for DRIPs.Many corporations raise capital by adopting dividend reinvestment plans Dividend Reinvestment Plan (DRP) Plan which provides for automatic reinvestment of shareholder dividends in more shares of a company's stock, often without commissions. Some plans provide for the purchase of additional shares at a discount to market price. (DRIPs), which permit shareholders to reinvest dividends at a discount. In conjunction With DRIPs corporations often adopt optional investment plans (OIPs), which permit investment of additional finds in corporate stock on a discounted basis. To participate in OIPs it often is necessary to participate in DRIPs. In revenue ruling 78-375 (sections 305(c) and (b)(2)) the Internal Revenue Service said a shareholder realizes taxable dividend income with respect to the DRIP based on the fair market value of the stock on the date of distribution. A purchaser of stock in the OIP OIP Office of International Programs OIP Observatoire International des Prisons (France) OIP Office of the Iraq Programme OIP Office of Information and Privacy (US DOJ) also sustains dividend income measured by the difference between the value of the stock purchased and the amount of the optional payment. However, in letter ruling 9509039 the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. said the bargain element in an OIP would not be a taxable constructive dividend constructive dividend A corporate payment to a stockholder that is characterized by the Internal Revenue Service as a dividend distribution even though the corporation calls it something else. when 1. There was no link between the DRIP and OIP. A shareholder could participate in the OIP regardless of participation in the DRIP. 2. A shareholder not participating in the OIP would not be entitled to a compensatory payment from the corporation. 3. The shareholder obtaining the ruling did not reinvest dividends under the DRIP. Observation: This ruling creates an incentive for capital-hungry corporations to remove the link between their DRIPs and their OIPs by providing shareholders participating in OIPs a rare opportunity to convert dividends into capital gains. - Robert Willens, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , managing director at Lehman Brothers, New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. . |
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