There
were several reasons for this. Only those shareholders who sold their shares as part
of the repurchase program had any potential tax liability. Shareholders who did not
participate did not owe any taxes. Furthermore, some shareholders who did participate
in the repurchase program might not owe any taxes on the funds they
received if they were tax-exempt institutions or if they sold their shares at a loss.
Finally, even those shareholders who participated in the repurchase program and
sold their shares for a profit paid taxes only at the (usually lower) capital gains tax
rate, and even that tax only applied to the gain, not to the entire value of the shares
repurchased. Consequently, investors could generally expect to pay far less in taxes
on money that a firm distributed through a share repurchase compared to money
paid out as dividends. That differential tax treatment in part explains the growing
popularity of share repurchase programs in the 1980s and 1990s.