Wednesday, January 08, 2003

Max brings up an otherwise unexplored aspect of the Bush stimulus plan (why do I keep wanting to make a buzzzing sound when I read those words?):
EVERYTHING'S COMING UP DIVIDENDS. You might think exempting dividends from tax "simplifies" the income tax. Nothing could be further from the truth. What it threatens to do is open up a huge avenue for tax avoidance, insofar as income can be recharacterized as "dividends." What are dividends, after all? Well, they are whatever the law says they are. For instance, under current law interest payments and short-term capital gains from money market funds are reported as "dividends." Will they be tax-exempt as well? One never knows, do one?
Are there any tax lawyers in the audience? Just how fluid is the definition of "dividends"? Could this proposal be the opening of a massive loophole in the tax code? One of the commenters to Max's post describes the following scenario:
Entity E1 creates entity E2, which buys entity E3, "liquidates" E3 (possibly by selling it to entity E4), distributes 100% of the proceeds as "dividends" to E1, and expires worthless, manifesting a 100% short-term capital loss on E1's original investment.
This thing has the potential to make Enron and WorldCom look like petty theft.


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