Let’s say that your small corporation borrows some money. Let’s further suppose that you that that borrowed money and then purchased dividend paying stocks with that money. You can’t deduct those dividends. It’s considered a form of double-dipping, as you can deduct the interest you pay on the borrowed money and the interest.
However, let’s assume your a large corporation, like Berkshire Hathaway, the famous investment vehicle run by Warren Buffet. You borrow $750 million which you characterize as strengthening your financial situation. You also purchase some dividend paying stocks. The IRS audits you and denies your dividend deduction, claiming that you violated the tax rules.
Berkshire Hathaway paid the tax and then sued in US District Court in Omaha. In a decision delivered today (but not yet available on the Internet), the court ruled that, “[It is] virtually impossible for the [IRS] to trace debt proceeds and thus assess tax deficiencies … against companies like Berkshire who engage in numerous investment transactions.” Berkshire Hathaway will receive a refund of $23 million plus interest, subject to a possible appeal by the IRS.
News Coverage: Reuters.