Saturday, January 14, 2012

The ‘I'm in Love with the Sound of My Own Theory’ Case

Taxpayer unsuccessfully fought the full inclusion of dividends in his taxable income under his self-developed “return of capital” theory. (A theory that the court deemed “without statutory basis” by the way.) TP claimed that a portion of the purchase price represented “accrued dividends” that had accumulated since the last record date. In TP’s view, these portions are treated as “returns of capital” and are not be includable in gross income.

Take Aways:

• Under TP’s theory he would have had to painstakingly reduce his basis in these shares by the part of the purchase price he recaptured through designating a portion of dividends as tax free returns of capital. This would result in higher taxable gains down the line when the shares were sold.

• What a surprise that his return was self-prepared!

• There is ample guidance on who recognizes dividends so it is sort of odd that he spent Lord knows how much time calculating accrued dividends and no time researching code. It is not as though this is a rare situation!

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