Income Tax in the United States and Dividend Income
Chapter 2 Research Problem
Jackal Corporation declared a dividend of $ 4 per share on September 15, 2013. The date of record was October 15 and the date of payment was October 22. The stock exchange on which the Jackal Corporation stock is traded set an ex- dividend date of October 22. On October 19, Coyote Corporation sold 1,000 shares of Jackal Corporation stock to Fox Corporation through the exchange for $ 75 per share. As required by exchange rules, Coyote signed an agreement that Fox was entitled to the dividend that was to be paid on October 22. Coyote Corporation, which had paid $ 45 per share for the Jackal Corporation stock in 2011, reported a long- term gain of $ 30,000 [($ 75 - $ 45) 1,000)] on its 2013 Federal tax return. Fox Corporation reported dividend income of $ 4,000 ($ 4 per share 1,000 shares) and took a 70% dividends received deduction. 1) Have Coyote Corporation and Fox Corporation reported these transactions properly? Please explain.
No they have not recorded them properly, according to Rev. Ruling 82-11, Coyote Corp. actually includes the dividend income for federal tax purposes because they are contractually entitled to receive the dividend on the date of record. Fox does not include the dividend income on their federal return. Rev. Rul 82-11 says:
“Therefore, in the present situation, the ex-dividend rules of a stock exchange will not control the determination of when a shareholder becomes entitled to a dividend for federal income tax purposes. Y cannot shift the burden of income taxation on dividends by selling the underlying shares of stock to Z after the dividends have been declared and determined owing to Y as the record holder of the shares on the record date because it is the holder on the record date who is entitled to a declared dividend.”
“Accordingly, the amount paid by Z to Y represents payment for two separate items, specifically, the right to receive the dividend and consideration for the underlying shares
Jackal Corporation declared a dividend of $ 4 per share on September 15, 2013. The date of record was October 15 and the date of payment was October 22. The stock exchange on which the Jackal Corporation stock is traded set an ex- dividend date of October 22. On October 19, Coyote Corporation sold 1,000 shares of Jackal Corporation stock to Fox Corporation through the exchange for $ 75 per share. As required by exchange rules, Coyote signed an agreement that Fox was entitled to the dividend that was to be paid on October 22. Coyote Corporation, which had paid $ 45 per share for the Jackal Corporation stock in 2011, reported a long- term gain of $ 30,000 [($ 75 - $ 45) 1,000)] on its 2013 Federal tax return. Fox Corporation reported dividend income of $ 4,000 ($ 4 per share 1,000 shares) and took a 70% dividends received deduction. 1) Have Coyote Corporation and Fox Corporation reported these transactions properly? Please explain.
No they have not recorded them properly, according to Rev. Ruling 82-11, Coyote Corp. actually includes the dividend income for federal tax purposes because they are contractually entitled to receive the dividend on the date of record. Fox does not include the dividend income on their federal return. Rev. Rul 82-11 says:
“Therefore, in the present situation, the ex-dividend rules of a stock exchange will not control the determination of when a shareholder becomes entitled to a dividend for federal income tax purposes. Y cannot shift the burden of income taxation on dividends by selling the underlying shares of stock to Z after the dividends have been declared and determined owing to Y as the record holder of the shares on the record date because it is the holder on the record date who is entitled to a declared dividend.”
“Accordingly, the amount paid by Z to Y represents payment for two separate items, specifically, the right to receive the dividend and consideration for the underlying shares