Companies may choose to repurchase stock rather than pay dividends, because the repurchase has significant tax advantages for shareholders. But frequent repurchases are likely to be challenged by the IRS.

Question

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Repurchases can allow shareholders to defer taxes until they sell their shares, potentially resulting in lower taxes. However, if the repurchases are deemed to be excessive and not for a legitimate business purpose, the IRS may challenge them and reclassify them as taxable dividends. It is important for companies to carefully consider the tax implications and ensure that their repurchase programs are in compliance with tax laws.

Companies May Choose to Repurchase Stock Rather Than Pay Dividends