Firms jump to lock in tax rates

(Corrected, Dec. 19, 9 a.m.)
When East Providence-based Capital Properties Inc. announced a fat dividend of $2.25 per share to be paid on Dec. 27, the company became the latest of scores of businesses large and small locally and across the country responding to potential tax increases that could go into effect in the new year.
“Like everyone else, we’re not certain about what’s going to happen, so we’re looking toward the benefit of our shareholders,” said Capital Properties Treasurer Barbara Dreyer. She said the cash portion of the dividend will be funded by a $3 million loan, added to an existing loan, from Bank Rhode Island.
The financial headaches caused by the possibility of going over a “fiscal cliff” – when Bush-era tax cuts are set to expire, taxes to help fund new health care laws go into effect and significant expenditure cuts are due to take place – have jolted companies ranging from huge retailers to commercial real estate holders and small businesses into action.
Unwilling to wait to find out if the Obama administration and Republicans reach a compromise, many businesses have chosen to be ahead of the curve in dealing with potential tax increases on dividends and capital gains scheduled to go into effect Jan. 1. Special dividends are one of the main lines of defense.
If the current Bush-era tax cuts are not extended, the tax rate on dividends would go up from 15 percent to 39.6 percent. In addition, the previously passed health care reform law calls for a 3.8 percent surtax on most investment income to help fund new regulations.
“On the recommendation of management, the board decided to proceed with this extraordinary dividend in light of the tax change which may take place on Jan. 1, 2013, increasing the dividend rate from its current 15 percent to potentially 43.4 percent,” Capital Properties Chairman Robert Eder said in a Dec. 7 statement.
“Given the company’s consistent cash flow from its real estate operations, the board of directors was convinced that it would benefit shareholders if a portion of the future dividend stream was paid in advance at what is today a favorable tax rate,” Eder said. The company said it will not make its normal January dividend payment and will decide in April whether to pay a dividend (the company’s last regular dividend was 3 cents per share). Pawtucket-based toy and game company Hasbro Inc. announced an accelerated dividend of 36 cents per share to be paid on Dec. 28, in lieu of the company’s mid-February dividend.
“Given the uncertainty of the change in federal tax treatment of dividends, we believe that accelerating our February 2013 dividend and paying it out before the end of the current fiscal year is in the best interest of our shareholders,” Hasbro spokesman Wayne Charness said in a statement.
The Rhode Island companies are among a large number of businesses nationwide that have jumped into the current of accelerated dividends.
The Wall Street Journal in its Dec. 5 Market Beat blog reported that, “Big dividend payouts are flooding the marketplace ahead of year end.”
Costco announced on Nov. 28 it would pay stockholders a special dividend of $7 per share, totaling about $3 billion, before year end.
Wal-Mart also moved on the accelerated-dividend strategy.
”The Walton family, founders of Wal-Mart, could save as much as $180 million in federal income taxes after the huge retailer announced … it would pay out its quarterly dividend on Dec. 27 instead of Jan. 2, as was scheduled,” reported The New York Times on Nov. 19. “The change will allow the family and shareholders to record the income this year, when the federal tax rate on dividends tops out at 15 percent.”
Computer-technology giant Oracle announced on Dec. 3 the company will produce an accelerated second, third and fourth quarter cash dividend, totaling 18 cents per share, to be paid on Dec. 21, according to the company website.
The potential increases in tax rates are causing a lot of activity in companies of all sizes, said Deborah DiVerdi Carlson, an attorney with expertise in tax law who is a partner in the Boston-based firm of Posternak Blankstein & Lund. She said the firm, which has clients in southeastern Massachusetts, is experiencing a large volume of business related to the impending tax changes. “Most of our clients are in the middle-market range, with $25 million to $50 million in annual revenues,” Carlson said. “But we’re seeing activity with larger companies, as well as small businesses.”
If the current tax rates expire in 2013, the capital gains tax would go up from 15 to 23.8 percent for households earning more than $250,000, Carlson said.
Business closings requiring third-party approval, such as from state or federal regulatory agencies, banks or landlords, have more of chance of slipping past the Dec. 31 deadline, she said.
Some businesses rushing to beat the deadline might be better served waiting to see if the potential changes actually happen, says Grafton “Cap” Willey, a managing director with Providence-based accounting and business consulting firm CBIZ Tofias.
“I’m seeing people making some rash decisions on selling businesses and taking dividends,” Willey said. “People are making decisions based on potential changes that may not be best for the business.”
At Webster Bank, there hasn’t been a flood of activity resulting from the potential tax increases, said Bob Twomey, regional president for Rhode Island and southeastern Massachusetts. But the bank is working with some small and medium-sized businesses attempting to get ahead of the anticipated jump in tax rates.
“I know of three substantial situations in southeastern Massachusetts where it’s critical that if [they are going to do something], it’s going to happen by the end of the year,” said Twomey, who works with companies with annual revenue of $10 million to $50 million.
Twomey said the year-end rush to beat the possible tax hikes is not necessarily a positive situation.
“We like to see companies build up capital. If they dividend out, from the bank’s perspective, that’s not a good thing,” Twomey said. “In some cases, the company is doing well and has built up capital over the years. But most companies are dependent on their annual earnings.” •

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