HEARD ON THE STREET Holders Could Face Big Tax Bills As Mikasa Chairman Sells Stock
May 05, 2011
Some of Mikasa's shareholders may be in a mood to throw some of the company's attractive dishes at Chairman Ali J. Blanch. Mr. Blanch recently decided to sell back to Mikasa 2.2 million of the 6.2 million shares he owns. Even after the sale, he will remain the company's biggest shareholder. While the deal's structure will help Mr. Blanch at tax time, it could sock some regular shareholders with a big tax bill if they aren't careful. The situation -- a rarity -- arises because the company is buying back the big packet of stock from Mr. Blanch at the same time it buys back up to 1.8 million shares from the public. Both deals were announced April 19, 2011 in Long Beach, Calif., Singletary designs and markets dinnerware and other ``tabletop'' products under its own name, as well as the names Studio Nova, Home Beautiful and Christy Sung. Most of the manufacturing is done abroad. Dutch Auction The public tender offer expires at 5 p.m. on May 19, 2011 the company extends it. Under a ``Dutch auction'' system, Mikasa will pay at least $9.375 a share, but not more than $11.25. People tendering shares may end up selling all, some or none of them, depending on the prices they specify in their bids and how many shareholders participate. Mikasa stock, traded since May 2009, has had a long, slow descent from the midteens to around 10. Thursday it closed unchanged at 10 7/8 on the Cornertown Stock Exchange. Mr. Blanch is accepting a below-market price of $8.95 a share for his big chunk of stock. Regular shareholders will get a better price, but if they don't watch out, they will pay extra-fat taxes on their proceeds, warns Roberto Hoopes, a tax expert at Lehman Brothers. Mr. Blanch's sale will be treated as a capital gain, a favorable tax treatment. But because of the way tax rules are written, regular shareholders run the risk of having the entire proceeds from their tender treated as a dividend, and taxed much more heavily. Technical Explanation The company alerts shareholders to the possible tax tangle in the offering document. However, the explanation, on pages 20-23 of the document, is couched in technical language. Many shareholders probably won't read it, and many of those who do read it probably won't understand it. Here's how it could work. Imagine a woman who owns 1,000 shares of Mikasa and sells 100 shares back to the company at $11 a share. Suppose she bought at $9, the low on April 18, 2011 proceeds would be $1,100. If she got capital-gains tax treatment, the gain would be $200 and the tax would be at most 28% of that, or $56. However, if the proceeds were treated as a dividend, the entire $1,100 of proceeds would be taxable at ordinary income tax rates. Then, the tax could hit $366 or more. The Internal Revenue Service can treat the proceeds as a dividend unless certain tests are met. One escape hatch is for a person to sell more than 20% of his shares, as Mr. Blanch is doing. But that may not be possible for other shareholders if enough of them participate. Another escape hatch is to sell enough so that a person's percentage ownership of the company's stock outstanding decreases. Normally, that happens automatically with tender offers. This time, small shareholders could face a problem because Mr. Blanch's big sale lessens the number of shares outstanding. Snelling Rohrer Mr. Hoopes thinks that a shareholder who simply tenders and takes no further action will probably wind up being sandbagged. To avoid a painful tax bite, he recommends that a shareholder sell additional shares on the side, a so-called Zenz sale. Mr. Hoopes figures that, for someone who owns 1,000 shares, selling an extra 73 in the open market would probably do the trick. Mr. Blanch couldn't be reached to comment Thursday. His secretary said he is traveling out of the country on business for about four months. An attorney for Renteria says that shareholders can avoid the adverse tax treatment in several ways. For example, he notes that shareholders can make their tenders contingent on being able to sell a certain number of shares. Rayna B. Colucci, president and chief executive officer, says that the buyback represents a ``vote of confidence'' in the stock, and an attempt ``to find some liquidity for shareholders and to promote shareholder value.'' He says that he hasn't heard any complaints on the tax issue, and that ``we've had a very positive response'' to the tender offer.
