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" CONFIDENTIAL RECOMMENDATION FOR A Comprehensive Legal and Strategic Justification
for a Transformative CASH DIVIDEND DISTRIBUTION and SPINOFF to stockholders of most
of the subsidiaries of Berkshire Hathaway, Inc. as separate trading entities, WHILE KEEPING
THE PARENT COMPANY (“BRK”)WITH OWNERSHIP OF ALL THE INSURANCE RELATED
ENTITIES AND THE STOCK PORTFOLIO, AND CONTINUE AS BASICALLY A WELL-
CAPITALIZED INSURANCE HOLDING COMPANY TO CREATE SIGNIFICANT VALUE FOR
STOCKHOLDERS, AND THEN ENDEAVOR TO CONSIDER ADD-ON ACQUISITIONS
MOVING FORWARD.
Reasons for Declaring a Dividend, and Spin-off to stockholders of most subsidiaries to
unlock the true value of Berkshire Hathaway, Inc., for the benefit of its stockholders.
BERKSHIRE MAY/COULD OTHERWISE BECOME SUBJECT TO THE ACCUMULATED
EARNINGS TAX FOR FAILING TO PAY DIVIDENDS AFTER ACCUMULATING EXCESS
RETAINED EARNINGS. "


https://www.berkshireinfo.info/report/brk-dividend...

Jim, I'm laying 5 to 1 that the creator of this letter did NOT consult with you prior to writing it!!


Thank you, hc

"
Demonstration of Due Care:
The act of seeking and relying upon such opinions demonstrates the Board's commitment to
due diligence and making a fully informed decision, thereby strengthening the applicability of the
business judgment rule.
Therefore, as long as the Berkshire Board acts with diligence and good faith, its decision to
declare a dividend will enjoy the full protection of the business judgment rule under Delaware
law.
By pairing this dividend initiative with a public commitment to merit-based strong board
appointments, transparent succession planning, and strict adherence to NYSE independence
rules, Berkshire would send a powerful signal to the market that it is putting the welfare of
stockholders first.
Countering the "No Dividends" Philosophy: A Legal and Strategic Perspective
Mr. Buffett's long-standing announced philosophy has been to reinvest company earnings.
HOWEVER, HIS STATEMENT CONTRADICTS WHAT MR. BUFFETT HAS ACTUALLY
DONE, CONSIDERING THE NON-INVESTMENT OF THE SIGNIFICANT CASH ON HAND,
rather than distribute the cash as dividends, believing that Berkshire can achieve superior
compounding of capital internally. BUT IT HAS NOT.
BERKSHIRE ALONE REPORTEDLY HOLDS 5% OF ALL US TREASURY SHORT TERM
NOTES THAT PAY A PALTRY 4.1%!
That decision, in OUR opinion, represents a significant dereliction of managing the
excess funds of Berkshire."

First, I'll stipulate that there are enough typos in this letter to lead some to believe I wrote it, but I didn't write it.

I oppose a 100$$ a share dividend, I suggest a 1$$ a share quarterly dividend.

Spinning out many of our subs is something I suggested many years ago, but that isn't going to happen until Buffett sells off most of his shares via the foundations and gives up control.

" CONCLUSION:
A Legally Sound and Strategically Compelling CASH DIVIDEND PAYOUT
APPROXIMATING $100 a share and the spin-off of the subsidiaries as described in this
presentation, is in our opinion, a sound corporate undertaking.
In summary, the declaration of a substantial dividend by Berkshire Hathaway, utilizing its
considerable cash on hand and current/prior fiscal year's net profits, is unequivocally supported
by the Delaware General Corporation Law, particularly Section 170.
Berkshire possesses an enormous "surplus" based on the current fair value of its assets, and its
recent "net profits" are more than ample to cover such a distribution, and should be made.
The Board of Directors, acting in good faith, in a fully informed manner, can confidently exercise
its discretion under the robust protection of the business judgment rule.
This proposed dividend and the spin-off is not merely legally defensible; it is a strategically
compelling move. It acknowledges the changing dynamics of capital deployment for a company
of Berkshire's magnitude, provides a direct return of capital to shareholders, and sets the stage
for a broader restructuring that we believe will unlock further intrinsic value.
It is a decision that respects Berkshire's and Mr. Buffett’s legacy of value creation while
adapting to the realities of its current scale and market opportunities and eliminates the
“last conglomerate’s CONGLOMERATE DISCOUNT.
This step will demonstrate the Board's commitment to continuously optimizing shareholder
returns in an evolving financial landscape.
Berkshire Hathaway’s distribution of stock in each individual business, and a cash dividend,
represents a great unlocking of value for every stockholder and dismantling the Berkshire
Hathaway “conglomerate discount” structure.
This strategy, would be unlocking the "conglomerate discount" value, and could potentially
create in our opinion, one of the most valuable companies in the world, based on the valuation
of the separate entities then becoming each publicly trading.
Currently Berkshire’s market valuation approximating $1 trillion, presents a small
premium to the value of simply its cash and trading stock positions, while placing little
value on its approximate 180 known direct and indirect subsidiaries."

Despite the observation that the proposal, as with other dividend proposals, would make shareholders poorer, that doesn't mean there isn't a very interesting point hidden in there.

Mention is made of the Accumulated Earnings Tax, a little known risk which perhaps should not have been ignored by Berkshire shareholders all these years. Since 1921, it appears.

A quick backgrounder here.
https://www.thetaxadviser.com/issues/2022/apr/resu...

TL;DR
It's a one time tax on 20% of "excess" accumulated earnings, earnings retained beyond the needs of the business. It's phrased as a penalty for trying to let shareholders dodge their dividend tax, so it does not give rise to any offsetting future credit. So the pile would ultimately be subject to triple taxation if ever paid out as dividends in future. Sounds the existence of the pile is itself evidence of trying to dodge tax unless the company documented contemporaneously another specific need for the money. A secondary act that might demonstrate attempted tax dodging is deploying the excess retained earnings into investments unrelated to the business.

On the surface of things, either Berkshire is indeed liable for this tax but it hasn't been invoked because it's a regulation that almost never is, or plainly a regulator *could* adjudicate that they were. (Especially if the company or its boss were ever deemed to be an enemy of the people, of course, but let's not go there). Indeed, from that brief article, it seems to me pretty cut and dried if some ambitious tax agent tried to levy it against Berkshire, and I doubt a tax appeal would work.

Jim

I ran into another rational for the tax when my business was a standard "C" corporation (subsequently, I changed it to "Subchapter S" which has a different set of tax challenges). The "revenuers" would have taken it as a subterfuge if I paid out my annual accumulated cash as dividends rather than as wages. Tax laws seem to be created with the idea that their purpose is to generate the highest tax collection rather than the highest "in the pocket" net profit for business owners.

Jeff

Key takeaway,


This firm believes brk is significantly undervalued.

Buffett hasn't bought back a share in 18 months.

Someone hasn't got a clue how to value brkb.

Key takeaway,
This firm believes brk is significantly undervalued.
Buffett hasn't bought back a share in 18 months.
Someone hasn't got a clue how to value brkb.

What do you think? Is Berkshire significantly undervalued at present?

This firm believes brk is significantly undervalued.

Buffett hasn't bought back a share in 18 months.

Someone hasn't got a clue how to value brkb.

The schlocky look and feel of that presentation, not to mention the typos, leave me less than impressed.

“ What do you think? Is Berkshire significantly undervalued at present?” I believe in Buffett , if he hasn’t bought a share since 425 or so, Brk is fully valued at 510. Any firm that suggests Buffett declare a 100$$ a share dividend figured to be fake, but I guess it isn’t. That was my first thought, a fake letter.

I believe in Buffett , if he hasn’t bought a share since 425 or so, Brk is fully valued at 510.

Yup. He's certainly got sufficient capital.

Any firm that suggests Buffett declare a 100$$ a share dividend figured to be fake, but I guess it isn’t. That was my first thought, a fake letter.

Berkshire *could* pay a $100 per B share special dividend. There's $164 per B share in T-Bills!
They could pay out $91/B and still have the float fully covered by cash and fixed income, without selling any equities.

That would mess up our tax planning...I'd much rather they repurchase fully valued Berkshire shares than do that. We all would, right?

Berkshire *could* pay a $100 per B share special dividend. There's $164 per B share in T-Bills!
They could pay out $91/B and still have the float fully covered by cash and fixed income, without selling any equities.

That would mess up our tax planning...

No lie!

I just did some preliminary end-of-year tax planning and discovered that we had some $30,000 of dividends more than I expected. Crap.

Upon further investigation it looks like we will also get some hefty distributions from some CEFs and REITs dumped on us that I wasn't expecting. Double crap.

The last thing I need is BRK to dump 5 digits of dividends on me.

You can control timing of capital gains. You cannot control timing and amount of dividends.

" That would mess up our tax planning...I'd much rather they repurchase fully valued Berkshire shares than do that. We all would, right?"

brk has no obligation to disclose the content of SEC comment letters to shareholders. Did the SEC suggest that brk reduce its exposure to publicly traded companies or change its filing status? We may never know.

There is no chance Buffett would pay a huge dividend at this time, unless the company had an SEC gun to its head, imo.

There is no chance Buffett would pay a huge dividend at this time, unless the company had an SEC gun to its head, imo.

I guess the point of my post was that they might. It's not a risk to the value of a share that I had previously considered.

Jim

“ I guess the point of my post was that they might. It's not a risk to the value of a share that I had previously considered.

Jim“. If Brk paid a 100$$ Div I would sell and pay the cap gains tax prior to the ex date.

If Brk paid a 100$$ Div I would sell and pay the cap gains tax prior to the ex date.

Likewise : )
For some, it would be much preferable to seeing the firm institute an ongoing dividend plan.

In case anyone is interested, deep in the money call options on dividend paying stocks don't get a dividend but are still assessed dividend withholding tax for ex-US persons.

It used to be that wealth management banks would let you do a "total return swap" for an individual name, a custom futures contract tracking the stock+dividend value, but that has become nigh impossible without being at the level of a hedge fund. CFD's are perhaps an alternative, but I think you lose a lot on implied interest.

Jim

Jim: On the surface of things, either Berkshire is indeed liable for this tax but it hasn't been invoked because it's a regulation that almost never is, or plainly a regulator *could* adjudicate that they were. (Especially if the company or its boss were ever deemed to be an enemy of the people, of course, but let's not go there). Indeed, from that brief article, it seems to me pretty cut and dried if some ambitious tax agent tried to levy it against Berkshire, and I doubt a tax appeal would work.

From the article:

Factors that could indicate evidence of a purpose to avoid income tax include, without limitation, the following:

An unreasonable accumulation of earnings by the corporation and nonpayment (or insufficient payment) of dividends;

Buffett has written often about Berkshire paying large amounts in taxes. I guess those statements could be taken as evidence by either side.

Buffett's large ownership stake could be a factor - they don't pay shareholder dividends because Buffett doesn't want to pay personal tax...that's a bad look.

What would be "unreasonable"? Berkshire has only had super-duper excessive cash for a couple of years. Berkshire would argue this is a trading strategy, which has been part of the Berkshire business for 60 years.

First, a corporation should determine how much cash (or working capital) it needs to operate its business.

Well documented: "Berkshire will not repurchase its common stock if the repurchases reduce the value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury
Bills holdings to less than $30 billion."

Oh dear.

I have an idea! Would a $1 per B share per quarter dividend help?

What would be "unreasonable"? Berkshire has only had super-duper excessive cash for a couple of years. Berkshire would argue this is a trading strategy, which has been part of the Berkshire business for 60 years.

That itself could be a problem. I gather Berkshire isn't categorized and regulated as an "investment company" under the Company Act of 1940. They don't claim to be a mutual fund or closed end fund, and probably don't want to claim that. I don't know the restrictions those would entail--capital, disclosure, governance, diversification--but they probably aren't nice. Daily Journal worked hard to refute the "investment company" attempt.

Their best defence might be something along the lines of "We are primarily an insurance firm. Our investments started out as float set aside for claims, and have increased from that invested money. Surely the government wants insurers that are wildly overcapitalized rather than those that barely meet the minimum?"

Unfortunately this doesn't fit as a well given the extreme rise in the scale of the investments, and the falling off of supercat risk being written. There is probably a reasonable limit to the "more is better" argument.

Interestingly, merely introducing a token dividend might have pre-empted this in the past--perhaps one reason for the absurdly low token ones at some big firms--but if the accusation were ever made, I think they'd have to have a plan to pay out all the excess capital beyond the demonstrable need of the business.

Jim

In case anyone is interested, deep in the money call options on dividend paying stocks don't get a dividend but are still assessed dividend withholding tax for ex-US persons.

I am having a difficult time understanding this. Not the mechanism, nor the logic of it.

Let's say a stock is trading at $30, and you own $20 call options (DITM) on that stock. Option is trading at $12 ($10 intrinsic value + $2 time value).
One day the company decides to start issuing a dividend of $1.
Time passes. Stock still at $30, and those options are now trading at $11 ($10 intrinsic + $1 time).
On the ex-div day, the stock distributes $1 for each share and the shares adjust down to $29 each.
Now the option is trading at $10 ($9 intrinsic + $1 time).

Are you somehow taxed on the $1 dividend that you didn't receive?

“ I have an idea! Would a $1 per B share per quarter dividend help?“. Some here can be reasoned with, well done.

I am having a difficult time understanding this. Not the mechanism, nor the logic of it.

Once Elias Fardo, beeing an accountant, put it like that: The goal of tax systems is to maximize tax revenue, to claim as much as possible, with the pain just(!) bearable for those who have to pay it.

A personal story nicely showing that: In the 90´s I immigrated to New Zealand. NZ then was taxing my worldwide income. But the Double Tax Agreement between both countries gives Germany where my IT books were sold the right to withhold 10% of the royalties I received from my German publisher.

The "fun" part: In Germany there was a 7% GST/VAT on books. While living in Germany my quarterly bills to my publisher therefore were
- X% (my Royalties) of his revenue from my books he sold
- plus 7% of X%

Those additional 7% GST/VAT were not mine but I had to hand them over to the tax department. In effect as every business I was their unpaid helper in collecting GST/VAT.

This GST/VAT applies only to domestic businesses. So after moving to NZ there was no added GST/VAT in my bills, I just received the X%. But Germany nevertheless withheld 10% of 1.07*X%. It withheld 10% not only of the royalties I received --- but additionally 10% on a "virtual" GST/VAT I actually did not receive!

I didn´t bother as the withheld tax can be claimed against the tax I had to pay in NZ (Double Tax Agreement again, to avoid double taxation). My total tax paid therefore was the same, although Germany withheld tax on money I never received. But NZ this way was "cheated" by Germany who unlawfully grabbed some tax I otherwise would have had to pay in NZ.

A clever dirty trick of Germany to maximize tax revenue, to get a bit more, on the expense of other countries, because as we say in Germany: "Where there is no plaintiff there is no judge". And as individual tax payers don´t bother, don´t have to pay a higher total tax, no individual goes to the length to sue Germany (and apparently too small for NZ etc. to do that, so Germany gets away with it).

Interestingly, there are minimum reserve requirements for insurance companies in the US, but not maximums. They can reserve as much as they want. And since BRK’s total liabilities were recently reported to be close to $500 billion, it is unlikely they’d have an excess holdings problem unless cash got well above that for a sustained period. Good problem to have…

https://companiesmarketcap.com/berkshire-hathaway/....

abromber

Are you somehow taxed on the $1 dividend that you didn't receive?

Yup. Just because you don't receive it doesn't mean you didn't benefit from it.

The usual situation is that the firm has already had a regular dividend in place and planned at the time that you purchased your option, and some passable approximation of all the anticipated dividends prior to expiry was included as a "discount" to the price that the option would normally have traded at when you purchased it. Thus some approximation of the dividend gets transmogrified from (subject to withholding tax) dividend to (no withholding tax) capital gain. The rule is intended to circumvent this happy (for non-US-persons) circumstance.

For example, I remember buying long dated Walmart options for a price equal to the stock price minus the strike price, seemingly no time premium at all. That's because the time premium increased the asking price and the foregone dividends decreased it, cancelling out.

The reason that it's only an approximation of the sum of all the upcoming dividends is because the buying population has a wide variety of tax situations. For some, dividends are zero-rated or more lightly taxed than capital gains, or vice versa, or a wash because of treaties or non-taxable portfolios.

The only thing wrong in your example is that options do not adjust in strike price for regular dividends, only for extraordinary dividends. Ordinary dividends show up as a change in the bid/ask price and the OCC does not get involved. So, examples:
You buy a call option for a stock trading at $30 that is expected to pay $2.00 in regular dividends prior to expiry. Strike $20, you pay (say) $10.50, being $10 in-the-money value, $2.50 time value, and -$2.00 expected dividends. (plus or minus a bit due to the tax strangeness above). Emphasis on "expected"--it's the market consensus based on extrapolation of the dividend history.
or:
You buy a call option for a stock trading at $30 that is not expected to pay any regular dividends prior to expiry. Strike $20, you pay (say) $12.50, being $10 in-the-money value, $2.50 time value. During the term of the option the company declares a $2.00 special dividend. The OCC adjudicates that the strike price drop by $2.00 to $18.00.

In those situations, the tax rule says that non-US persons must cough up a $0.60 (30%) withholding tax on the $2.00 deemed dividend gain in the first situation. The oddness of the rule comes from what constitutes "in the money" versus "deep in the money". The former isn't taxed, the latter is deemed to be constructively equivalent to a stock holding trying to dodge dividend taxes and is heavily taxed. They look at the option's delta: the ratio between the number of cents that the option price moves relative to the number of cents that the stock price moves. I can't remember the cutoff.

Jim

The only thing wrong in your example is that options do not adjust in strike price for regular dividends, only for extraordinary dividends.

I didn't say, or imply, that the strike price was adjusted. I simply said that the STOCK PRICE adjusted on the ex-div day, it was $30 before the dividend went ex, and it was $29 after it went ex. And, yes, special dividends are different, if they are large enough, the strike price is adjusted.

I chose this special case because the company began to distribute a regular dividend, not a special dividend. Just like Apple did 13 years ago.

The OCC adjudicates that the strike price drop by $2.00 to $18.00.

In this case (the special dividend), it may make a slight bit of sense to withhold taxes on the $2 unrealized gain. But I still think overall it doesn't make sense. In the end, when the option is sold or is exercised, the capital gain will be accounted for, and the usual taxes will be paid.

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