ch12 - H Chapter Twelve H INTERNATIONAL TAXATION SOLUTIONS...

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Unformatted text preview: H Chapter Twelve H INTERNATIONAL TAXATION SOLUTIONS TO RESEARCH PROBLEMS RESEARCH PROBLEMS 12-34 A shareholder who owns ‘‘consent stock’’ and files the necessary forms may elect to receive a consent dividend. A consent dividend is identical to a cash dividend in all respects except no cash is transferred. Therefore, it is not subject to foreign withholding tax (§ 565). The consent dividend is treated as if the stockholder received a cash dividend and immediately reinvested it in the corporation as a capital contribution. Thus, the corporation’s earnings and profits decrease [§ 561(a)(2)], and the stockholder’s basis for the stock increases [Reg. § 1.565-3(a)] by the amount of the dividend as of the last day of the corporation’s tax year. Any stockholders not making the election must be paid a cash dividend at the same per share rate [Reg. § 1.565-2(b)(2)]. Otherwise, the consent dividend is disallowed. 5- Consent stock is any class of stock that shares in earnings and profits after preferred dividends are paid [§ 565(f)]. Election is made by a stockholder filing Form 972—Consent of Shareholder to Include Specific Amount in Gross Income with the foreign corporation. It may be filed anytime during the foreign corporation’s tax year and through the due date of its tax return, including extensions allowed [Reg. § 1.565-1(b)(3) and Rev. Rul. 78-296, 1978-2, C.B. 183]. The foreign corporation must include Form 973—Claim for Deduction for Consent Dividends with its tax return. If it does not file a U.S. Federal return, the form is to be attached to the shareholder’s return with Form 972. The election cannot be revoked later [Reg. § 1.565-1(c)]. 5- Previously, consent dividends were used to avoid penalty taxes for excessive accumulated earnings and for U.S. and foreign personal holding companies [Reg. § 1.561-1(a)]. But in a number of private letter rulings issued since 1977, the IRS has stated that consent dividends may be used for any foreign corporation [Letter Ruling 7832023 (5/10/1978) was the first one issued]. However, there remains considerable doubt about whether a consent dividend was intended to be available for corporations other than those subject to a penalty tax. If the IRS reverses its position stated in the letter rulings, the stockholder will be taxed on the dividend, but the foreign corporation will not be able to reduce its earnings and profits [Reg. § 1.565-1(c)(2)]. 5- Taxpayers must proceed cautiously in this area. Cash or other assets should be distributed when possible. Consideration should be given to requesting a letter ruling. Otherwise, management should be advised against the consent dividend for the West German subsidiary until the issue is settled by Congress, the courts, or revenue ruling....
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This note was uploaded on 07/26/2011 for the course TAX 772 taught by Professor Ber during the Spring '11 term at Hartford.

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ch12 - H Chapter Twelve H INTERNATIONAL TAXATION SOLUTIONS...

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