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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: valueminded who wrote (60123)	5/21/1999 10:53:00 AM
From: Knighty Tin	Respond to of 132070

Chris, Both of your questions have the same answer. The reason dividends were so important to corporations, as opposed to individuals, is that there is something called The Intercorporate Dividend Tax Exclusion. The way this worked, a corporation like The St. Paul, could capture a dividend and only pay regular corporate taxes on 15% of the amount they were paid. This went directly to earnings per share. (Some folks ask why I know so much about corporate earnings scams. I pioneered many of them. <g>) You can see why this is much more attractive to a corporation than to an individual, who gets to pay full tax rates. Corps were eager to swap capital for income. If they lost a dollar in capital, at that time the govt. ate 46% of it. Whereas the govt. only got about 7% of the dividend. So a swap was a winner for the corps. Of course, I liked to get a cap gain and a dividend, but I play hard ball, and many went for the straight tradeoffs. Back when I was running the game, the IRS required that we hold the positions "at risk" for 15 days before we could get the tax exclusion. The 15 days was solid. The "at risk" was mushy, and my main job was to make "at risk" as unrealistic as possible. Some firms sold calls and bought puts, a forward conversion, but out lawyers, correctly, IMHO, decided that that violated the "at risk" clause. But, since you could certainly lose money with a covered call write, you were at risk during the 15 days minimum. The Treasury and mainly the states noticed that tax revenues fell off a cliff when The St. Paul and USG and several other players started using dividend captyre in size. To overcome this, they increased the risk holding period to 45 days. That took all the air out of my enthusiasm for dividend capture.