Optional Redemptions and Optional Dividends: Taxing the Repurchase of Common Shares

The growth of share repurchasing as an element of financial strategyfor large, publicly held corporations\u27 raises an issue of interpretationunder the federal income tax that has significance both for ordinaryinvestors and for the revenues. That issue-whether a corporate distributionwhich results in the retirement of outstanding shares shouldbe treated as essentially equivalent to a taxable dividend-is an entirelyfamiliar one to tax lawyers, but it is one that has typically beenconfined to closely held or family-owned corporations, whose cash distributionsare likely to take whatever form best suits the individualtax and financial interests of their controlling shareholders. By contrast,the owner of stock in a public company is powerless to dictatethe form in which corporate distributions may be cast, and the absenceof a family or other personal relationship between managementand shareholders is generally expected to relieve management of anyspecial concern for the tax objectives of shareholders. Moreover, thoseobjectives are probably so diverse and conflicting that no single distributionpolicy would seem capable of satisfying all shareholders inequal measure. Consequently, public companies with scattered stockholdingsdo not commonly generate dividend equivalence problems,and the ordinary investor is rarely an object of the tax collector\u27ssuspicion