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Taxable Events Webinar Takes on Dividends
Monday, July 20, 2015
On July 15th we hosted our 6th taxable events webinar, “Tax Analysis of Dividends.” Similar to attendance for our previous webinars about tax analysis / accounting of securities transactions (TAST), turnout was strong, with repeat attendees. Thank you to all of our webinar participants -- tax managers, compliance officers, tax analysts, controllers, chief financial officers and accountants from hedge funds, hedge fund service providers and accounting & audit firms -- for joining us for this event.
Our resident TAST guru, George Michaels, G2 FinTech CEO and Founder, led this discussion and provided an overview of IRC rules pertaining to Qualified Dividends (IRC § 1(h)(11)), Dividends Received Deductions (IRC § 243) and Short Dividends (IRC §263(h)).Throughout the webinar, Mr. Michaels explained how integral aspects of each of these rules -- holding period requirements and hedging – can affect the tax status of dividends. As in the past, Mr. Michaels presented different examples of trading activity and explained how to apply the various Dividend rules to a variety of straightforward and more complex securities transactions. In his usual style, Mr. Michaels sprinkled the presentation with refreshing and timely puns. At the close of the presentation, Mr. Michaels and fellow TAST expert, Daniel Tilkin, G2’s Software Engineering Team Lead & Senior Tax Analyst, fielded a number of participant questions.
Qualified Dividend Income (QDI)
After reviewing the different tax rates that apply to qualified (taxed at a maximum rate of 20%. The 20% rate is for taxpayers in the 39.6% tax bracket) and non-qualified dividends (taxed as ordinary income, currently a 39.6% maximum), Mr. Michaels went on to highlight different aspects of the QDI rule. Among other things, he discussed holding period requirements (taxpayers must hold [unhedged] a position in the dividend-paying security for 61 out of a possible 121 days surrounding the ex-dividend date) and noted that hedges (short positions, stock options, swaps and other securities that reduce risk of loss from the dividend-paying security) can suspend a holding period. Mr. Michaels then proceeded to walk participants through no less than four examples of different trading activity that resulted in qualified and non-qualified dividends due to holding period and hedging criteria.
Dividends Received Deduction (DRD)
In his discussion about DRD, which applies to corporations that receive dividends, Mr. Michaels talked about multiple layers of taxation, when this can occur and how it can dissuade companies from issuing positive dividend actions, particularly when some of their shareholders are also corporations. "off the top of the head" quick example of triple taxation. Mr. Michaels also explained that the DRD rule is mostly the same rule as QDI with a a 45-day window (46 of 91) and in certain cases, treatment of preferred dividends. One DRD example illustrated how holding shares unhedged for a requisite period of time can result in a dividend qualifying for a deduction.
Short Dividends / 263(h)
Last but not least, Mr. Michaels defined and discussed Short Dividends (IRC §263(h)), which governs when a short position, which pays a dividend, can be deducted as an investment expense. He noted that if a taxpayer holds a position for less than 46 days, deductions will be disallowed. Instead, a less-desirable result, taking the dividend as a basis adjustment, will apply. Mr. Michaels also noted how the 263(h) rule differs from QDI/DRD; there is no “window” and the 46 days can be satisfied at any time (even potentially years later).
During the Q&A period, attendees asked: How does securities lending affect the holding period requirements? For 263(h), you said the 46 days can be satisfied years later. What happens if at tax time, you still hold the position, but haven't met the 46-day requirement, so you don't know the proper treatment? With their usual aplomb, Mr. Michaels and Mr. Tilkin fielded these queries. After the webinar, one attendee kept the conversation about securities lending going through e-mail.
Webinar Recording / PDF & Other TAST Resources
After the presentation, quite a few attendees shared positive comments about the webinar and requested copies of the webinar slides and access to the video recording. As always, we will make available both the recording on our Youtube channel and a pdf of the slides available on our website. For additional TAST resources, visit our Resource page.
Stay tuned for more information about upcoming webinars: