Stock Restrictions

[Corduroy Frog]

A friend of mine was asking about restrictions for a C-corp buying stock "dividends on."

I'm not aware of any restrictions for any entity purchasing stock just before dividends are declared. I do know that a "wash sale" will prevent the deduction of a loss.

I've always been told that an effective way for an individual to convert ordinary income into capital gains was to sell the stock just before dividends were declared. The stock price increases and becomes capital gains, whereas if you wait, the price will decrease and the dividends become ordinary income. But this is pure strategy, and somewhat outdated in these days of a 15% ceiling on both dividends and capital gains.

A C-corp can't take advantage of capital gains rates, but DOES have a "dividends received" deduction, so the above strategy would work in reverse.

Am I missing something? Is there some kind of "restriction" on C-corp stock trading which is poor tax strategy??

[Corduroy Frog]

Dividends Received

I guess there's not much of an outpouring of responses on this one. The good news is that apparently most of you aren't aware of any such restrictions either.

The only thing I can possibly think of is if a C corp does excessive churning of dividends-on investing, there might be some restriction on the Dividends Received deduction (available only to C-corps).

[AuditorTurnedGood]

I would say

just keep the stock out of the C-Corp altogether. As you pointed out, there is no capital gain/loss treatment within a C-Corp, so I can't think of a good reason to keep stocks within one. Also, the DRD is determined based on the C-Corp's ownership percentage, if memory serves. Also, depending on what the C-Corp does as its business, you might end up getting whacked with Personal Holding Company status by the IRS if enough of the income of the company is generated by "portfolio" assets. Hope this helps.

ATG

[Nashville]

Maybe an Example

will illustrate a potential issue.

You are the owner of a C-Corp and have $100,000 to invest. Huckleberry has a history of paying dividends twice annually, and one of the critical dates is just a few days away. Ordinarily the stock is worth $100 but there is a $2 dividend expected. So you buy 1000 shares of Huckleberry at $102/share.

Sure enough, you have bought just in time to receive the $2 dividend, and this pays $2000. You have a 70% dividends received deduction, meaning you will only be taxed on $600.

What is your basis in Huckleberry?

a. $102,000 (what you actually paid for it)
b. $100,600 (what you paid, less the exempt dividends)
c. $100,000 (value of the stock without the "dividends-on" consideration)