Has anyone had occasion to deal with an "extraordinary dividend" received by a Trust? Specifically, I'm looking at IRC 643(a)(4).
A "promoter" is asserting the position that "extraordinary dividends (as determined under state law) would be allocable to principal AND not be taxed. I can agree with the first piece, but not the second.
Seems to me that if it is a return of capital, it lowers the basis and is not taxed (other than indirectly when the asset is eventually sold.) Otherwise as you suspect it's a taxable dividend. I don't think we have enough info to tell which it is.
On the IRS website the term "extraordinary dividends" seems to have a specific meaning, but it's vague. I wasn't able to figure out if that has anything to do with whether or not it's taxable. I hope someone else can figure it out better than I could.
According to Stuart O. Bronstein snipped-for-privacy@lexregia.com:
A little googlage finds 26 USC 1059 which explains it all if the recipient of the dividend is a corporation.
An extraordinary dividend is more than 5% for preferred stock, 10% otherwise, with some rules about aggregating over 85 days, or over a year where the total exceeds 20%. It looks like in most cases it's treated as half dividend, half return of capital, with a long list of exceptions.
26 CFR 1.643(a)-4 has a rule if the recipient is a trust.BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.