An Empirical Inquiry into the Judicial Determination of Dividend Equivalence In Stock Redemptions.

The purpose of this study is to determine the impact of the United States Supreme Court's Davis decision on subsequent court cases involving dividend equivalence in stock redemptions. Two discriminant analyses were performed on all post-1954 dividend equivalence cases litigated in Federal courts. Results of this study indicate that the 1970 Davis decision dramatically changed the judicial decision process. Two variables, valid business purpose and a plan to retire a shareholder's interest in the corporation, were found to be significant predictors of the decision before Davis with 75 percent of the pie-Davis cases correctly classified by these two variables. The decisions after Davis identified three totally different variables as significant: the percentage reduction in a shareholder's interest, the percentage of total voting stock owned by the shareholder after redemption, and the loss of special rights. These variables, which are more objective in nature, correctly classified 85.7 percent of the post-Davis decisions. This result suggests that taxpayer-shareholders should be able to correctly classify the factors that determine dividend equivalence and plan their stock redemptions so as to avoid passive dividend treatment. [ABSTRACT FROM AUTHOR]