Normally, a taxpayer is not permitted to “turn his back” on income. To be sure, taxpayers must include their gross income in IRS filings when that income is either actually, or constructively, received. Moreover, under the pervasive “assignment of income” doctrine, a taxpayer cannot assign earned income to another taxpayer (and hence, avoid reporting the income) by transferring the right to receive that income.
However, if a taxpayer meets the conditions of Rev. Proc. 67-14, the IRS does allow an individual to waive the dividend income he or she would otherwise be entitled.
Those conditions are as follows:
Furthermore, the IRS maintains that any ruling issued with respect to the waiver automatically expires three years from the date it was issued.
But, Rev. Proc. 67-14 is only applicable for cases in which both the waiving and non-waiving shareholders are individuals. Thus, technically, the right to waive dividends was not available to the taxpayer depicted in LTR 200312016. In this case, a bank holding company, that owned a majority of stock in an operating bank, sought to waive its share of the dividends the bank was scheduled to pay.
Notwithstanding the technical inapplicability of Rev. Proc. 67-14—because, here, the waiving shareholder was a corporation—the IRS applied its tenets to grant the taxpayer the desired ruling. Indeed, the case met the Rev. Proc. 67-14 conditions.
There was a bona fide business reason for the waiver. It went like this: the waiver would allow the bank to pay dividends to its minority shareholders who owned its publicly traded stock. Such payment, in turn, would enhance the market value of the bank’s stock, which would then provide the bank with greater access to the capital markets for future equity offerings. Therefore, waving the dividend (no dividends would be remitted to the bank holding company) would permit the bank to maintain “adequate capital.”
Furthermore, to secure a ruling, it was necessary for the bank holding company to show that there was no “direct business relationship” (because the waiving shareholder was a corporation, there was no need to show the concurrent absence of a “direct family relationship”) between the waiving and non-waiving shareholders.
Here, that condition was met because the officers and trustees of the bank holding company owned a de minimis amount of stock in the bank—about 1 percent.
Accordingly, a ruling was obtained that will last for the ensuing three years. Essentially, the bank holding company—principal shareholder of the bank—will not be in receipt of gross income when the bank declares and pays dividends.