Dividends and Other Corporate Distributions Dividends are distributions of money, stock, or other property paidto you by a corporation. You also may receive dividends through apartnership, an estate, a trust, or an association that is taxed as acorporation. However, some amounts you receive that are calleddividends are actually interest income. (See Dividends that areactually interest under Taxable Interest -- General,earlier.) You may receive any of the following kinds of distributions. Ordinary dividends. Capital gain distributions. Nontaxable distributions. Most distributions that you receive are paid in cash (check).However, you may receive more stock, stock rights, other property, orservices. Form 1099-DIV.Most corporations use Form1099-DIV,Dividends and Distributions, to show you the distributionsyou received from them during the year. Keep this form with yourrecords. You do not have to attach it to your tax return. Even if youdo not receive Form 1099-DIV, you must still report all of yourtaxable dividend income. Nominees.If someone receives distributions as a nominee for you, that personwill give you a Form 1099-DIV, which will show distributionsreceived on your behalf. If you receive a Form 1099-DIV that includes amountsbelonging to another person, see Nominees under How ToReport Dividend Income, later, for more information. Form 1099-MISC.Certain substitute paymentsin lieu of dividends or tax-exempt interest that are received by abroker on your behalf must be reported to you on Form 1099-MISC,Miscellaneous Income, or a similar statement. See alsoReporting Substitute Payments under Short Salesin chapter 4. Incorrect amount shown on a Form 1099.If you receive a Form 1099 that shows an incorrect amount (or otherincorrect information), you should ask the issuer for a correctedform. The new Form 1099 you receive will be marked "CORRECTED." Dividends on stock sold.London accommodationIf stock is sold, exchanged, or otherwise disposed of after adividend is declared, but before it is paid, the owner of record(usually the payee shown on the dividend check) must include thedividend in income. Dividends received in January.If a regulated investment company (mutual fund) or real estateinvestment trust (REIT) declares a dividend (including anyexempt-interest dividend) in October, November, or December payable toshareholders of record on a date in one of those months but actuallypays the dividend during January of the next calendar year, you areconsidered to have received the dividend on December 31. You reportthe dividend in the year it was declared. Ordinary Dividends Ordinary (taxable) dividends are the most common type ofdistribution from a corporation. They are paid out of the earnings andprofits of a corporation and are ordinary income to you. This meansthey are not capital gains. You can assume that any dividend youreceive on common or preferred stock is an ordinary dividend unlessthe paying corporation tells you otherwise. Ordinary dividends will beshown in box 1 of the Form 1099-DIV you receive. Dividends used to buy more stock.The corporation in whichyou own stock may have a dividend reinvestment plan. Thisplan lets you choose to use your dividends to buy (through an agent)more shares of stock in the corporation instead of receiving thedividends in cash. If you are a member of this type of plan and youuse your dividends to buy more stock at a price equal to its fairmarket value, you still must report the dividends as income. If you are a member of a dividend reinvestment plan that lets youbuy more stock at a price less than its fair market value, you mustreport as dividend income the fair market value of the additionalstock on the dividend payment date. You also must report as dividend income any service chargesubtracted from your cash dividends before the dividends are used tobuy the additional stock. But you may be able to deduct the servicecharge. See Expenses of Producing Income in chapter 3. In some dividend reinvestment plans, you can invest more cash tobuy shares of stock at a price less than fair market value. If youchoose to do this, you must report as dividend income the differencebetween the cash you invest and the fair market value of the stock youbuy. When figuring this amount, use the fair market value of the stockon the dividend payment date. Money market funds.Report amounts you receive from money market funds as dividendincome. Money market funds are a type of mutual fund and should not beconfused with bank money market accounts that pay interest. Capital Gain Distributions Capital gain distributions (also called capital gain dividends) arepaid to you or credited to your account by regulated investmentcompanies (commonly called mutual funds) andreal estate investment trusts (REITs). They will be shownin box 2a of the Form 1099-DIV you receive from the mutual fundor REIT. Report capital gain distributions as long-term capital gains,regardless of how long you owned your shares in the mutual fund orREIT. See Capital gain distributions under How ToReport Dividend Income, later in this chapter. If you receive capital gain distributions on mutual fund or REITstock you hold 6 months or less and sell at a loss, see Loss onmutual fund or REIT stock held 6 months or less underHolding Period in chapter 4. Undistributed capital gains of mutual funds and REITs.Some mutual funds and REITs keep their long-term capital gains andpay tax on them. You must treat your share of these gains asdistributions, even though you did not actually receive them. However,they are not included on Form 1099-DIV. Instead, they arereported to you on Form 2439,Notice to Shareholder ofUndistributed Long-Term Capital Gains. The Form 2439 will also show how much, if any, of the undistributedcapital gains is unrecaptured section 1250 gain or gain from qualifiedsmall business stock (section 1202 gain). (For information about theseterms, see Capital Gain Tax Rates in chapter 4.) Report undistributed capital gains (box 1a of Form 2439) aslong-term capital gains in column (f) on line 11 of Schedule D (Form1040). Enter on line 11 of the Unrecaptured Section 1250 GainWorksheet in the Schedule D instructions the part reported toyou as unrecaptured section 1250 gain. For any gain on qualified smallbusiness stock, follow the reporting instructions under Section1202 Exclusion in chapter 4. The tax paid on these gains by the mutual fund or REIT is shown inbox 2 of Form 2439. You take credit for this tax by including it online 64, Form 1040, and checking box a on that line. Attach Copy B ofForm 2439 to your return, and keep Copy C for your records. Basis adjustment.Increase your basis in your mutual fund, or your interest in aREIT, by the difference between the gain you report and the credit youclaim for the tax paid. Nontaxable Distributions You may receive a return of capital or a tax-free distribution ofmore shares of stock or stock rights. These distributions are nottreated the same as ordinary dividends or capital gain distributions. Return of Capital A return of capital is a distribution that is not paid out of theearnings and profits of a corporation. It is a return of yourinvestment in the stock of the company. You should receive a Form1099-DIV or other statement from the corporation showing youwhat part of the distribution is a return of capital. On Form1099-DIV, a nontaxable return of capital will be shown in box 3.If you do not receive such a statement, you report the distribution asan ordinary dividend. Basis adjustment.A return of capital reduces the basis of your stock. It is nottaxed until your basis in the stock is fully recovered. If you buystock in a corporation in different lots at different times, and youcannot definitely identify the shares subject to the return ofcapital, reduce the basis of your earliest purchases first. When the basis of your stock has been reduced to zero, report anyadditional return of capital that you receive as a capital gain.Whether you report it as a long-term or short-term capital gaindepends on how long you have held the stock. See Holding Periodin chapter 4. Example.You bought stock in 1988 for $100. In 1990, you received a returnof capital of $80. You did not include this amount in your income, butyou reduced the basis of your stock to $20. You received a return ofcapital of $30 in 2000. The first $20 of this amount reduced yourbasis to zero. You report the other $10 as a long-term capital gainfor 2000. You must report as a long-term capital gain any return ofcapital you receive on this stock in later years. Liquidating distributions.Liquidatingdistributions, sometimes called liquidating dividends, aredistributions you receive during a partial or complete liquidation ofa corporation. These distributions are, at least in part, one form ofa return of capital. They may be paid in one or more installments. Youwill receive Form 1099-DIV from the corporation showing you theamount of the liquidating distribution in box 8 or 9. Any liquidating distribution you receive is not taxable to youuntil you have recovered the basis of your stock. After the basis ofyour stock has been reduced to zero, you must report the liquidatingdistribution as a capital gain (except in certain instances involvingcollapsible corporations). Whether you report the gain as a long-termor short-term capital gain depends on how long you have held thestock. See Holding Period in chapter 4. Stock acquired at different times.If you acquired stock in the same corporation in more than onetransaction, you own more than one block of stock in the corporation.If you receive distributions from the corporation in completeliquidation, you must divide the distribution among the blocks ofstock you own in the following proportion: the number of shares inthat block over the total number of shares you own. Dividedistributions in partial liquidation among that part of the stock thatis redeemed in the partial liquidation. After the basis of a block ofstock is reduced to zero, you must report the part of any laterdistribution for that block as a capital gain. Distributions less than basis.If the total liquidating distributions you receive are less thanthe basis of your stock, you may have a capital loss. You can report acapital loss only after you have received the final distribution inliquidation that results in the redemption or cancellation of thestock. Whether you report the loss as a long-term or short-termcapital loss depends on how long you held the stock. See HoldingPeriod in chapter 4. Distributions of Stockand Stock Rights Distributions by a corporation of its own stock are commonly knownas stock dividends. Stock rights (also known as "stock options")are distributions by a corporation of rights to acquire thecorporation's stock. Generally, stock dividends and stock rights arenot taxable to you, and you do not report them on your return. Taxable stock dividends and stock rights.Distributions of stock dividends and stock rights are taxable toyou if any of the following apply. You or any other shareholder has the choice to receive cashor other property instead of stock or stock rights. The distribution gives cash or other property to someshareholders and an increase in the percentage interest in thecorporation's assets or earnings and profits to othershareholders. The distribution is in convertible preferred stock and hasthe same result as in (2). The distribution gives preferred stock to some common stockshareholders and common stock to other common stockshareholders. The distribution is on preferred stock. (The distribution,however, is not taxable if it is an increase in the conversion ratioof convertible preferred stock made solely to take into account astock dividend, stock split, or similar event that would otherwiseresult in reducing the conversion right.) The term "stock" includes rights to acquire stock, and theterm "shareholder" includes a holder of rights or convertiblesecurities. If you receive taxable stock dividends or stock rights, includetheir fair market value at the time of the distribution in yourincome. Constructive distributions.You must treat certain transactions that increase yourproportionate interest in the earnings and profits or assets of acorporation as if they were distributions of stock or stock rights.These constructive distributions are taxable if they have the sameresult as a distribution described in (2), (3), (4), or (5) of theabove discussion. This treatment applies to a change in your stock's conversion ratioor redemption price, a difference between your stock's redemptionprice and issue price, a redemption that is not treated as a sale orexchange of your stock, and any other transaction having a similareffect on your interest in the corporation. Preferred stock redeemable at a premium.If you hold preferred stock having a redemption price higher thanits issue price, the difference (the redemption premium) generally istaxable as a constructive distribution of additional stock on thepreferred stock. For stock issued before October 10, 1990, you include theredemption premium in your income ratably over the period during whichthe stock cannot be redeemed. For stock issued after October 9, 1990,you include the redemption premium on the basis of its economicaccrual over the period during which the stock cannot be redeemed, asif it were original issue discount on a debt instrument. SeeOriginal Issue Discount (OID), earlier in this chapter. The redemption premium is not a constructive distribution, andtherefore is not taxable, in the following situations. The stock was issued before October 10, 1990 (beforeDecember 20, 1995, if redeemable solely at the option of the issuer),and the redemption premium is "reasonable." (For stock issuedbefore October 10, 1990, only the part of the redemption premium thatis not "reasonable" is a constructive distribution.) Theredemption premium is reasonable if it is not more than 10% of theissue price on stock not redeemable for 5 years from the issue date oris in the nature of a penalty for making a prematureredemption. The stock was issued after October 9, 1990 (after December19, 1995, if redeemable solely at the option of the issuer), and theredemption premium is "de minimis." The redemption premium is deminimis if it is less than one-fourth of 1% (.0025) of the redemptionprice multiplied by the number of full years from the date of issue tothe date redeemable. The stock was issued after October 9, 1990, and must beredeemed at a specified time or is redeemable at your option, but theredemption is unlikely because it is subject to a contingency outsideyour control (not including the possibility of default, insolvency,etc.). The stock was issued after December 19, 1995, and isredeemable solely at the option of the issuer, but the redemptionpremium is in the nature of a penalty for premature redemption orredemption is not more likely than not to occur. The redemption willbe treated under a "safe harbor" as not more likely than not tooccur if all of the following are true. You and the issuer are not related under the rules discussedin chapter 4under Losses on Sales or Trades of Property,substituting "20%" for "50%." There are no plans, arrangements, or agreements thateffectively require or are intended to compel the issuer to redeem thestock. The redemption would not reduce the stock's yield. Basis.Your basis in stock or stock rights received in a taxabledistribution is their fair market value when distributed. If youreceive stock or stock rights that are not taxable to you, seeStocks and Bonds in chapter 4for information on how tofigure their basis. Fractional shares.You may not own enough stock in a corporation to receive a fullshare of stock if the corporation declares a stock dividend. However,with the approval of the shareholders, the corporation may set up aplan in which fractional shares are not issued, but instead are sold,and the cash proceeds are given to the shareholders. Any cash youreceive for fractional shares under such a plan is treated as anamount realized on the sale of the fractional shares. You mustdetermine your gain or loss and report it as a capital gain or loss onSchedule D (Form 1040). Your gain or loss is the difference betweenthe cash you receive and the basis of the fractional shares sold. Example.You own one share of common stock that you bought on January 3,1992, for $100. The corporation declared a common stock dividend of 5%on June 30, 2000. The fair market value of the stock at the time thestock dividend was declared was $200. You were paid $10 for thefractional-share stock dividend under a plan described in the aboveparagraph. You figure your gain or loss as follows: Fair market value of old stock $200.00 Croatia HotelesFair market value of stock dividend (cashreceived)   + 10.00 Fair market value of old stock and stockdividend   $210.00 Basis (cost) of old stock after the stockdividend(($200 $210) $100) $95.24 Basis (cost) of stock dividend(($10 $210) $100)    + 4.76 Total   $100.00 Cash received $10.00 Basis (cost) of stock dividend    - 4.76 Gain     $5.24 Because you had held the share of stock for more than 1 year at thetime the stock dividend was declared, your gain on the stock dividendis a long-term capital gain. Scrip dividends.A corporation that declares a stock dividend may issue you a scripcertificate that entitles you to a fractional share. The certificateis generally nontaxable when you receive it. If you choose to have thecorporation sell the certificate for you and give you the proceeds,your gain or loss is the difference between the proceeds and the partof your basis in the corporation's stock that is allocated to thecertificate. However, if you receive a scrip certificate that you can choose toredeem for cash instead of stock, the certificate is taxable when youreceive it. You must include its fair market value in income on thedate you receive it. Other Distributions You may receive any of the following distributions during the year. Exempt-interest dividends. Exempt-interest dividends you receive from a regulated investmentcompany (mutual fund) are not included in your taxable income. Youwill receive a notice from the mutual fund telling you the amount ofthe exempt-interest dividends you received. Exempt-interest dividendsare not shown on Form 1099-DIV or Form 1099-INT. If you receive exempt-interest dividends on stock you hold 6 monthsor less and sell at a loss, see Loss on mutual fund or REIT stockheld 6 months or less under Holding Period in chapter 4. Information reporting requirement.Although exempt-interest dividends are not taxable, you must showthem on your tax return if you have to file a return. This is aninformation reporting requirement and does not change theexempt-interest dividends to taxable income. See Reportingtax-exempt interest under How To Report Interest Income,earlier. Alternative minimum tax treatment.Exempt-interest dividends paid from specified private activitybonds may be subject to the alternative minimum tax. See Form 6251 andits instructions for more information. Dividends on insurance policies.Insurance policy dividends that the insurer keeps and uses to payyour premiums are not taxable. However, you must report as taxableinterest income the interest that is paid or credited on dividendsleft with the insurance company. If dividends on an insurance contract (other than a modifiedendowment contract) are distributed to you, they are a partial returnof the premiums you paid. Do not include them in your gross incomeuntil they are more than the total of all net premiums you paid forthe contract. (For information on the treatment of a distribution froma modified endowment contract, see Distribution Before AnnuityStarting Date From a Nonqualified Plan under Taxation ofNonperiodic Payments in Publication 575, Pension andAnnuity Income.) Report any taxable distributions on insurancepolicies on line 16b (Form 1040) or line 12b (Form 1040A). Dividends on veterans' insurance.Dividends you receive on veterans' insurance policies are nottaxable. In addition, interest on dividends left with the Departmentof Veterans Affairs is not taxable. Patronage dividends.Generally, patronage dividends you receive in money from acooperative organization are included in your income. Do not include in your income patronage dividends you receive on: Property bought for your personal use, or Capital assets or depreciable property bought for use inyour business. But you must reduce the basis (cost) of the itemsbought. If the dividend is more than the adjusted basis of the assets,you must report the excess as income. These rules are the same whether the cooperative paying thedividend is a taxable or tax-exempt cooperative. Alaska Permanent Fund dividends.Do not report these amounts as dividends. Instead, report theseamounts on line 21 of Form 1040, line 13 of Form 1040A, or line 3 ofForm 1040EZ. How To ReportDividend Income Words you may need to know (see Glossary): Nominee Restricted stock Generally, you can use either Form 1040 or Form 1040A to reportyour dividend income. Report the total of your ordinary dividendincome on line 9 of Form 1040 or Form 1040A. If you receive capital gain distributions, you may be able to useForm 1040A or you may have to use Form 1040. See Capital gaindistributions, later. If you receive nontaxable distributionsrequired to be reported as capital gains, you must use Form 1040. Youcannot use Form 1040EZ if you receive any dividend income. Form 1099-DIV.If you owned stock on which you received $10 or more in dividendsand other distributions, you should receive a Form 1099-DIV.Even if you do not receive a Form 1099-DIV, you must report allof your taxable dividend income. 1099 DIV See Form 1099-DIV for more information on how to reportdividend income. Form 1040A.You must complete Part II of Schedule 1 (Form 1040A) and attach itto your Form 1040A, if: Your ordinary dividends (box 1 of Form 1099-DIV) aremore than $400, or You received, as a nominee, dividends that actually belongto someone else. List on line 5 each payer's name and the amount of ordinarydividends you received. If you received a Form 1099-DIV from abrokerage firm, list the brokerage firm as the payer. Enter on line 6 the total of the amounts listed on line 5. Alsoenter this total on line 9, Form 1040A. Form 1040.You must fill in Part II of Schedule B and attach it to your Form1040, if: Your ordinary dividends (box 1 of Form 1099-DIV) aremore than $400, or You received, as a nominee, dividends that actually belongto someone else. If your ordinary dividends are more than $400, you must alsocomplete Part III of Schedule B. List on line 5, Part II of Schedule B, each payer's name and theamount of ordinary dividends you received. If your securities are heldby a brokerage firm (in "street name"), list the name of thebrokerage firm that is shown on Form 1099-DIV as the payer. Ifyour stock is held by a nominee who is the owner of record, and thenominee credited or paid you dividends on the stock, show the name ofthe nominee and the dividends you received or for which you werecredited. Enter on line 6 the total of the amounts listed on line 5.(However, if you hold stock as a nominee, see Nominees,later.) Also enter this total on line 9, Form 1040. Dividends received on restricted stock.Restricted stock is stock that you get from your employer forservices you perform and that is nontransferable and subject to asubstantial risk of forfeiture. You do not have to include the valueof the stock in your income when you receive it. However, if you getdividends on restricted stock, you must include them in your income aswages, not dividends. See Restricted Property inPublication 525 for information on restricted stock dividends. Your employer should include these dividends in the wages shown onyour Form W-2. If you also get a Form 1099-DIV for thesedividends, list them on line 5 of Schedule B (Form 1040), with theother dividends you received. Enter a subtotal of all your dividendincome several lines above line 6. Below the subtotal, write"Dividends on restricted stock reported as wages on line 7, Form1040," and enter the amount of the dividends included in your wageson line 7, Form 1040. Subtract this amount from the subtotal and enterthe result on line 6, Part II of Schedule B. Election.You can choose to include the value of restricted stock in grossincome as pay for services. If you make this choice, report thedividends on the stock like any other dividends. List them on line 5,Part II of Schedule B, along with your other dividends (if the amountof ordinary dividends received from all sources is more than $400). Ifyou receive both a Form 1099-DIV and a Form W-2 showingthese dividends, do not include the dividends in your wages reportedon line 7, Form 1040. Attach a statement to your Form 1040 explainingwhy the amount shown on line 7 of your Form 1040 is different from theamount shown on your Form W-2. Independent contractor.If you received restricted stock for services as an independentcontractor, the rules in the previous discussion apply. Generally, youmust treat dividends you receive on the stock as income fromself-employment. Capital gain distributions.How to report capital gain distributions depends on whether youhave any other capital gains or losses. If you do, report capital gaindistributions (box 2a of Form 1099-DIV) in column (f) of line13, Part II of Schedule D (Form 1040). If you do not have any othercapital gains or losses, you may be able to report your capital gaindistributions directly on line 13 of Form 1040 or line 10 of Form1040A. In either case, see Reporting Capital Gains and Lossesin chapter 4for more information. The mutual fund or real estate investment trust (REIT) making thedistribution should tell you how much of it is unrecaptured section1250 gain (box 2c) and how much is section 1202 gain (box 2d). (Forinformation about these terms, see Capital Gain Tax Ratesin chapter 4.) Enter on line 11 of the Unrecaptured Section 1250 GainWorksheet in the Schedule D instructions the part reported toyou as unrecaptured section 1250 gain. If you have a gain on qualifiedsmall business stock (section 1202 gain), follow the reportinginstructions under Section 1202 Exclusion in chapter 4. Nontaxable (return of capital) distributions.Report return of capital distributions (box 3 of Form1099-DIV) only after your basis in the stock has been reduced tozero. After the basis of your stock has been reduced to zero, you mustshow this amount on line 1, Part I of Schedule D, if you held thestock 1 year or less. Show it on line 8, Part II of Schedule D, if youheld the stock for more than 1 year. Write "Dividend R.O.C.Exceeding Basis" in column (a) of Schedule D and the name of thecompany. Report your gain in column (f). Your gain is the amount ofthe distribution that is more than your basis in the stock. Nominees.If you received ordinary dividends as a nominee (that is, thedividends are in your name but actually belong to someone else),include them on line 5 of Schedule 1 (Form 1040A) or Schedule B (Form1040). Several lines above line 6, put a subtotal of all dividendincome listed on line 5. Below this subtotal, write "NomineeDistributions" and show the amounts received as a nominee. Subtractthe total of your nominee distributions from the subtotal. Enter theresult on line 6. File Form 1099-DIV with the IRS.If you received dividends as a nominee in 2000, you must file aForm 1099-DIV for those dividends with the IRS. Send the Form1099-DIV with a Form 1096, Annual Summary andTransmittal of U.S. Information Returns, to your InternalRevenue Service Center by February 28, 2001 (April 2, 2001 if filingelectronically). Give the actual owner of the dividends Copy B of theForm 1099-DIV by January 31, 2001. On Form 1099-DIV, youshould be listed as the "Payer." The other owner should be listedas the "Recipient." You do not, however, have to file a Form1099-DIV to show payments for your spouse. For more informationabout the reporting requirements and the penalties for failure to file(or furnish) certain information returns, see the GeneralInstructions for Forms 1099, 1098, 5498, and W-2G. Liquidating distributions.If you receive a liquidating distribution on stock, the corporationwill give you a Form 1099-DIV showing the amount of theliquidating distribution in boxes 8 and 9. For a discussion of the treatment of liquidating distributions, seeReturn of Capital under Nontaxable Distributions,earlier in this chapter.