3 questions: selling future qualified dividends in 2010?

Clever idea.

It certainly wouldn't be a Qualified Dividend. It might be Long-term Capital Gain, part of which would go to reducing your basis.

It ought to be some form of Capital Gain.

Not yours.

No way. You're a prohibited person wrt your IRA. Now, if you wanted to sell those dividends (at a suitable discount, of course) to _my_ IRA, that would be legal.

Seth

I just thought of all those companies that buy structured settlements, annuities, pending lawsuits, and lottery winnings. I assume that the tax consequence to the sellers is well established. Of course, the underlying payments in all these cases is Ordinary Income and I assume the the upfront payment to the seller is also Ordinary Income, but what's driving this? Is it the nature of the underlying future cash flows? If that's the case, then qualifying the sale as Qualified Dividends just might fly.

Tom Young

I don't understand this answer nor do I understand Seth's answer. The OP is trying to find a way to eliminate the receipt of ordinary dividend income in 2011 that is qualified dividend income in 2010, and still maintain ownership of the shares. I know of no way to accomplish that. The corporation is obligated to distribute its stock dividends to the registered shareholders. Would someone please enlighten me as to how one avoids the dividends being credited to one's account if you own the stock? I'm just not aware of any corporation that allows you to assign your ownership rights to a dividend. I'm not even sure that security law allows it.

In addition, it is not clear to me that this could even make financial sense as corporate dividends are not guaranteed. As such, the discount applied to any future revenue stream would have to be substantial.

It's not up to the corporation or securities laws. It's a simple transaction assigning an income stream. The mechanics might of doing so might be a problem, but legally it's ok.

I doubt it would solve OP's problem, though. Normally assigning the right to receive income (whether in exchange for a cash payment or not) is considered ordinary income to the transferor rather than capital gain.

That would have a tendency to reduce the value, but not make it valueless. You're right, it's not likely OP would get many people to pay what he'd consider a reasonable amount of money for the right to receive dividends. But even if he were to do so, I'd guess he wouldn't be able to get the tax treatment he's looking for.

By the way, OP called this a huge tax increase. From a historical perspective he's been getting a huge tax subsity for several years, and that subsidy is just going away.

I'm the OP and I wasn't answering my own question, I was just bringing up a conceptually similar and very common transaction - the selling of future cash flows such as structured settlements

- to see if whatever tax law that governs how this sort of sale is taxed might provide insight as to how my proposed transaction might be taxed. The mechanics of how the deal would be structured in order to make it work weren't part of the original question, but I suppose the stock would have to be moved to a special purpose, limited life vehicle like a 3rd party-administered trust for the duration of the contract.

The deal clearly makes sense as a tax arbitrage and whether it would ultimately make sense economically does hinge on the discount. However, I have a feeling that there are people out there that might feel more positively about, say, the next 5 years of the dividends from Procter & Gamble ( 40+ years of ever-increasing dividends

And I'd like to know, "why is that?" The finance companies that buy lottery winnings, and annuity payments are buying cash flows that would be taxed in any case as ordinary income so there's a logic (alien concept in tax law, I know) that the payment would be taxed to the seller as ordinary income. (Though, in the case of the seller of an annuity there might be a basis in the annuity that might generate a capital gain or loss element.) Can you provide any cite to a discussion of the tax treatment of the sale?

TIA.

Tom Young

Lottery winnings from the California state lottery are free of state taxes to the winner, so that's not a good example.

The right to the income, and the tax attributes of the income, are two different things. I might be able to sell you my right to the income, but the tax attributes are not mine to sell.

-Mark Bole