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Corporations That Distribute All Income As Dividends nobody 08-23-2008
Posted by nobody on August 23, 2008, 10:47 pm
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Classic C corporations pay a corporate tax on earnings and then optionally
distribute what is left as a dividend to shareholders. Even with tax
reform in 2003 that still introduces a level of double taxation. Is
there any type of entity that would be able to distribute all of the net
income *as a dividend rather than as ordinary income*?

I have noticed that some public traded companies - typically oil and gas
limited liability companies - are able to distribute all of their earnings
as a dividend. An example would be Linn Energy (NASDAQ: LINE), which pays
out currently over 11% of the share price as a dividend, which I assume
would qualify for the 5% / 15% tax rate treatment of qualified dividends
under the tax reform of 2003. How are they are able to do pay out net
income as a dividend without incurring an additional layer of tax on
earnings? Is this privilege something that is industry specific or can it
be used by any kind of company to structure net income to be paid out as
dividends and bypass tax on ordinary income?

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Posted by DF2 on August 24, 2008, 12:57 pm
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In misc.taxes.moderated, nobody wrote:

>Classic C corporations pay a corporate tax on earnings and then optionally
>distribute what is left as a dividend to shareholders. Even with tax
>reform in 2003 that still introduces a level of double taxation. Is
>there any type of entity that would be able to distribute all of the net
>income *as a dividend rather than as ordinary income*?

No type can issue all of its income that misses the corporate tax
rules as a qualified dividend. Some class C corporations miss paying
corporate income tax by paying out the available money as salaries.
The salaries are deductible, and the corporation can then pay no
income tax because of no income. But the salary receivers pay income
tax.

S corps can have some savings by paying a mix of non-qual dividends
and salaries.

>
>I have noticed that some public traded companies - typically oil and gas
>limited liability companies - are able to distribute all of their earnings
>as a dividend. An example would be Linn Energy (NASDAQ: LINE), which pays
>out currently over 11% of the share price as a dividend, which I assume
>would qualify for the 5% / 15% tax rate treatment of qualified dividends
>under the tax reform of 2003.

You assume wrongly. Linn Energy, LLC is an LLC. They will issue a
K-1, and things will pass thru to the unitholder's income tax forms.
There are probably significant deductions, but the net income is
taxed as income-- not as qualified dividends. They do tend to have
taxable income much lower than the distributions during the early
part of the life. The income tax can be relatively complex, but
theses things can be good investments due to the high yields. There
are some tax advantages where the expenses of oil wells and
explorations tend to be deductible early in the life.

Also, note that oil/gas wells do run out of oil. They are being
depleted, so an 11% yield takes into account that the cash flow is
not expected to last for a really long time.


> How are they are able to do pay out net
>income as a dividend without incurring an additional layer of tax on
>earnings? Is this privilege something that is industry specific or can it
>be used by any kind of company to structure net income to be paid out as
>dividends and bypass tax on ordinary income?

Some tax deferrals and credits are industry specific. Oil and real
estate are two such industries that come to mind.

My observations are neither professional nor necessarily precise.

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<< The foregoing was not intended or written to be used, >>
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Posted by LoTax on August 24, 2008, 1:01 pm
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> Classic C corporations pay a corporate tax on earnings and then optionally
> distribute what is left as a dividend to shareholders. � Even with tax
> reform in 2003 that still introduces a level of double taxation. � � Is
> there any type of entity that would be able to distribute all of the net
> income *as a dividend rather than as ordinary income*?
>
> I have noticed that some public traded companies - typically oil and gas
> limited liability companies - are able to distribute all of their earnings
> as a dividend. � An example would be Linn Energy (NASDAQ: LINE), which pays
> out currently over 11% of the share price as a dividend, which I assume
> would qualify for the 5% / 15% tax rate treatment of qualified dividends
> under the tax reform of 2003. � �How are they are able to do pay out net
> income as a dividend without incurring an additional layer of tax on
> earnings? � Is this privilege something that is industry specific or can it
> be used by any kind of company to structure net income to be paid out as
> dividends and bypass tax on ordinary income?
>

It looks to me like Linn Energy is an LLC, and they have this to say
about their treatment as a partnership for income tax purposes:

"Tax Risks to Unitholders
� Our tax treatment depends on our status as a partnership for federal
income tax purposes, as well as our not being subject to entity-level
taxation by individual states. If the IRS were to treat us as a
corporation for federal income tax purposes or we were to become
subject to entity-level taxation for state tax purposes, taxes paid,
if any, would reduce the amount of cash available for distribution."

And - but this is only a guess - I suspect their distribution to their
investors is *not* a dividend, and not a qualifying dividend, and is
not subject to the special 15% tax rate. They probably send out a K-1
to their investor/partners.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Alan on August 24, 2008, 7:27 pm
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LoTax wrote:
>> Classic C corporations pay a corporate tax on earnings and then optionally
>> distribute what is left as a dividend to shareholders. � Even with tax
>> reform in 2003 that still introduces a level of double taxation. � � Is
>> there any type of entity that would be able to distribute all of the net
>> income *as a dividend rather than as ordinary income*?
>>
>> I have noticed that some public traded companies - typically oil and gas
>> limited liability companies - are able to distribute all of their earnings
>> as a dividend. � An example would be Linn Energy (NASDAQ: LINE), which pays
>> out currently over 11% of the share price as a dividend, which I assume
>> would qualify for the 5% / 15% tax rate treatment of qualified dividends
>> under the tax reform of 2003. � �How are they are able to do pay out net
>> income as a dividend without incurring an additional layer of tax on
>> earnings? � Is this privilege something that is industry specific or can it
>> be used by any kind of company to structure net income to be paid out as
>> dividends and bypass tax on ordinary income?
>>
>
> It looks to me like Linn Energy is an LLC, and they have this to say
> about their treatment as a partnership for income tax purposes:
>
> "Tax Risks to Unitholders
> � Our tax treatment depends on our status as a partnership for federal
> income tax purposes, as well as our not being subject to entity-level
> taxation by individual states. If the IRS were to treat us as a
> corporation for federal income tax purposes or we were to become
> subject to entity-level taxation for state tax purposes, taxes paid,
> if any, would reduce the amount of cash available for distribution."
>
> And - but this is only a guess - I suspect their distribution to their
> investors is *not* a dividend, and not a qualifying dividend, and is
> not subject to the special 15% tax rate. They probably send out a K-1
> to their investor/partners.
>
It's a Master Limited Partnership. One thing you need to watch
out for is UBTI (unrelated Business Taxable Income) if you own
this type of entity in an IRA. More than $1000 of UBTI requires
the IRA to file form 990-T and pay taxes at trust rates. In
addition, the trustee is the one who files the tax return for the
trust (an IRA is a trust). Suffice to say, trustees do not file
tax returns for IRAs for free.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by LoTax on August 24, 2008, 1:03 pm
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> Classic C corporations pay a corporate tax on earnings and then optionally
> distribute what is left as a dividend to shareholders. � Even with tax
> reform in 2003 that still introduces a level of double taxation. � � Is
> there any type of entity that would be able to distribute all of the net
> income *as a dividend rather than as ordinary income*?


Here's a paragraph from Linn Energy LLC's recent press release, which
says quite a bit by what it doesn't say, if you know what I mean:

"Cash Distributions
In July 2008, the Company's Board of Directors declared a quarterly
cash distribution of $0.63 per unit, or $2.52 per unit on an
annualized basis, with respect to the second quarter 2008. The
distribution will be paid on August 14, 2008 to unitholders of record
as of the close of business on August 7, 2008."

Note that they don't mention shareholders or dividends, only
unitholders and distributions. I suspect this distribution is *not* a
qualifying dividend, and that the company's taxable income is reported
as a "distributable item" to its owners on Schedule K-1. i.e.,
*partnership* taxation.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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