Treasury And IRS Speed Through New Dividend Tax Technical Regulation

by Leroy Baker, Tax-News.com, New York

23 February 2004

In an unusual step, the US treasury and the IRS have agreed to make certain provisions of the Tax Technical Corrections Act of 2003 related to dividend income available to taxpayers in advance of its passage, a move that will help shareholders and mutual funds complete their 2003 tax returns.

The Chairmen and Ranking Members of both the House Ways and Means Committee and the Senate Finance Committee have advised the Treasury Department and the IRS that they plan to enact legislation that will make last year’s dividend tax cut effective from January 1st 2003.

To reduce the burden of requiring the issue of amended dividend statements to investors, who might then have to amend their tax returns, the government has agreed to let all taxpayers apply the technical corrections in Section 2 of the Act as if the legislation were already enacted.

Some mutual funds that received payments from partnerships have delayed issuing Forms 1099-DIV to shareholders while awaiting enactment of these corrections. The Act will allow partnerships, S corporations, estates and revocable trusts treated as part of an estate on a fiscal year that began in 2002 to pass through dividends received in 2003 to their partners, shareholders and beneficiaries as dividends qualifying for the lower tax rates, to the extent that the dividends are otherwise qualified.

The Act will also change the holding period test for qualified dividends. To qualify for the lower tax rates, the taxpayer must now hold the dividend-paying stock for at least 61 days during the 121-day period (instead of the current 120-day period) beginning 60 days before the ex-dividend date – the first date that the buyer will not be entitled to receive that dividend.

A similar holding period exists for preferred stock dividends attributable to a period exceeding 366 days. This holding period is at least 91 days during a 181-day period beginning 90 days before the ex-dividend date.

Mutual funds, other regulated investment companies, and real estate investment trusts that pass through dividend income to their shareholders must meet the holding period test for the dividend-paying stocks that they hold in order for corresponding amounts that they pay out to be reported as qualified dividends on Form 1099-DIV.

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