A Wrinkle in Tax Time
Committee Discusses Qualified Dividends

By Simon Eskow

Practitioners dealing with high-volume securities-trading clients face a challenge in verifying qualified dividends on 1099 forms, members of the New York State Society of CPAs’ Partnership and LLCs Committee said last month.

Heavy trading makes it difficult to confirm whether a client qualifies for the lower tax rate under the 121-day rule and even more difficult to determine whether a stock is hedged, barring it from the qualified dividend altogether.

“You’re not going to go back with 400 positions to see whether each is hedged or not,” said Chairman Richard Nichols, during the committee’s regular meeting on Feb. 24. “This seems like the taxpayer’s obligation.”

The task becomes stickier as clients typically do not receive detailed statements from their brokers that would confirm that a stock was hedged.

Members suggested that the most practical approach is to take each client on a case-by-case basis, and assume that for clients who are not active traders, the amount in line 1-b on the 1099 form is accurate. However, the committee did not issue any official opinion on the matter.

“If you have an active trader, you may have to do a little more digging,” Nichols said.

Members said some brokerage houses are working on ways to determine what stocks are hedged while some firms are developing analysis tools for large trading clients.

Taxpayers can have a qualified dividend if they hold on to a stock for at least 61 days in a 121-day period (instead of the previous 120-day period) beginning 60 days before the ex-dividend date.

Reportable Transactions

The committee also talked at length about the requirements of Form 8886, which demands taxpayers report transactions that fall generally under six categories but include a plethora of cash thresholds and other exceptions.

The members focused largely on loss transactions, which are particularly beset with different parameters depending on the entity that is reporting the transaction and the gross loss of the transaction.

Members said that the disclosures—a side effect of the Internal Revenue Service’s crackdown on abusive tax shelters—may require statements to defend the transactions. When taxpayers file their taxes, a copy of the transaction disclosure gets sent to the IRS’ Office of Tax Shelters.