Companies' Last Tax Dodge of 2012: Paying Out December Dividends

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Ethan AllenEthan Allen was a businessman, a writer, and an American Revolutionary War hero. He's generally portrayed as a patriot.

Can the same be said about Ethan Allen Interiors (ETH)?

The furniture retailer became the latest company to move up a quarterly distribution to December -- a move that will help shareholders avoid inevitable tax increases on qualified payouts come 2013.

That's not all. Ethan Allen on Monday also declared a special dividend of $0.41 a share that will be paid out in December, serving up an additional disbursement that will be taxed at kinder 2012 rates.

Dividends Going Over the Fiscal Cliff

Ethan Allen's news may not sound so bad at first. The high-end retailer is merely looking out for its shareholders. The tax rate on qualified dividends is an attractive 15 percent right now, but unless a bipartisan deal spares it, that rate will go up sharply for many investors.

If the temporary tax cuts are allowed to expire, the dividend rate may climb as high as nearly 39 percent for high-income earners -- and that rate goes up to nearly 43 percent once the new health care tax kicks in next year.

Ethan Allen's move is obviously the right one for its stakeholders, but what about from the country's tax-starved coffers. The money being saved by investors on taxes this year is money that won't be generated in tax revenue come 2013.

Is this move to benefit shareholders actually cheating the country?

December Is the New January

Companies historically declare this time of year, but they don't physically shell them out until early January. Pushing the implications of the taxable event into the following year was done for the benefit of the shareholders.

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Now that tax rates on qualified distributions are on the way up, more and more companies are cutting dividend checks in late December. Some, like casino operator Wynn Resorts (WYNN) and gun maker Sturm Ruger (RGR), are taking an additional step, and will pay an even bigger one-time disbursement that will go out before tax laws get stiffer next year.

The more popular move, though, is for companies to simply move up their early January distributions to late December. Ethan Allen joins Walmart (WMT) and countless other companies making similar concessions in recent weeks.

Not another reason to protest Walmart

It's easy to bash Walmart these days. The world's largest retailer is an easy target. It gets taken to task for its employment practices, though no one is forcing anyone to work at the discount department store chain. It gets taken to task for opening early on Thanksgiving, but plenty of other retailers did the same thing -- and some employees probably appreciated the extra pay.

It's inevitable that Walmart will also become the poster child of any potential outcry of critics arguing that dividend distributions in December are cheating the country out of necessary revenue.

It's not fair. Companies serve their shareholders and their customers. They're not under a mandate to maximize tax liabilities. We also don't know what investors will do with the tax savings on the early and special dividends. One possible outcome is that investors will do a bit more holiday shopping this season than usual.

Companies didn't declare the class war or cause the fiscal cliff. They're just adapting to the implications.

Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article.



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