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Saratoga Investment Corp. Message Board

  • slcehamrick slcehamrick Nov 12, 2012 6:16 PM Flag

    The Stock Dividend and IRS Requirements

    I called a contact at KPMG and got filled on the stock dividend and IRS requirements. There was a private letter ruling in the spring of 2012 (you can google for it but it was almost certainly at the request of SAR based on the facts described addressing the situation. In the letter ruling the IRS stated that a dividend in which stockholders had an election to receive at least 20% in cash would be considered "income" to the stockholder in its entirety, i.e., including the stock dividend, under IRC section 301. Given that the entire dividend will be taxable to the stockholder, a reasonable inference (although not explicitly stated by the IRS) that an 80/20 dividend would be considered a "dividend" for RIC purposes.

    Therefore there will be no tax, income or excise, to SAR on the $4.25.

    This ruling does highlight a structural weakness in the BDC model. It obviously isn't very hard for a determined BDC to avoid the cash dividend requirement.

    Here's the rub . . . I believe in order to avoid any potentially messy tax issues ALL shareholders who request a 100% cash dividend will receive it. Management shares and many non-management shares will take the cash minimum. Also, SAR is not PROHIBITED in any way from paying more than 20% of the dividend in cash, it is simply prohibited from paying LESS than 20%.

    Congratulations on your new 22% yield!

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