The dividend-credit rule, also referred to as the cast-iron-pipe doctrine, states that if a company has remaining funds from unpaid dividends on preferred stock, it must prioritize using those funds to pay dividends on preferred stock before distributing dividends on common stock.
The dividend-credit rule, also known as the cast-iron-pipe doctrine, states that a company’s reserve fund, consisting of unpaid dividends on preferred stock, must be utilised to pay subsequent dividends on preferred stock before any dividend payments are made on common stock. In the case of a company with both preferred and common stock, preferred stockholders are entitled to a fixed dividend payment each year, while common stockholders may or may not receive a dividend depending on the company’s financial performance. If the company is unable to pay the preferred stock dividend in a given year, the unpaid amount accumulates in a reserve fund. According to the dividend-credit rule, any subsequent dividend payments to preferred stockholders must be sourced from this reserve fund before any payments are made to common stockholders. For instance, if a company has $100,000 in its reserve fund and owes $50,000 in unpaid preferred stock dividends, it must utilise the entire reserve fund to pay the preferred stockholders before any payments can be made to common stockholders. If the reserve fund does not have sufficient funds to cover the full amount owed to preferred stockholders, the remaining amount will continue to accumulate in the reserve fund until it can be paid in full.
The Dividend-Credit Rule is a legal principle that allows a taxpayer to claim a credit for foreign taxes paid on income that is also subject to U.S. taxation.
Under the Dividend-Credit Rule, if a U.S. taxpayer receives foreign income that is subject to both foreign and U.S. taxes, they can claim a credit for the foreign taxes paid against their U.S. tax liability.
The Dividend-Credit Rule applies to income from foreign corporations, as well as income from foreign partnerships and other foreign entities.
Yes, there are limitations on the amount of foreign tax credit that can be claimed, and the credit cannot exceed the U.S. tax liability on the foreign income.
Taxpayers can claim the foreign tax credit by filing Form 1116 with their U.S. tax return and providing documentation of the foreign taxes paid.
Yes, the Dividend-Credit Rule applies to both individual and corporate taxpayers who have foreign income subject to both foreign and U.S. taxes.
If no foreign taxes were paid on the foreign income, the taxpayer may not be able to claim the foreign tax credit under the Dividend-Credit Rule.
Yes, there are special rules for passive income, high-taxed income, and income from certain countries that may affect the application of the Dividend-Credit Rule.
Yes, taxpayers can carry forward unused foreign tax credits for up to 10 years under the Dividend-Credit Rule.
It is recommended to consult with a tax attorney or accountant who is knowledgeable about international tax law to get personalized advice on how the Dividend-Credit Rule applies to your specific circumstances.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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