Strategies & Market Trends : Income Taxes and Record Keeping ( tax ) -- Ignore unavailable to you. Want to Upgrade?

To: Ira Player who wrote (4555)2/10/2004 1:31:04 AM
From: Ira Player  Respond to of 5696
Follow up to my questions:

If the stock was bought for $8.00 and the $4.50 "Extraordinary Cash Dividend" is treated as a dividend (taxed at 15%) and the 'loss' is treated as a short term loss, then a taxpayer in the following tax brackets will still be ahead, as long as the ex-dividend price is above the following levels (Nominal break even would be $3.50):

25% marginal tax bracket: $2.90
28% marginal tax bracket: $2.69
33% marginal tax bracket: $2.29
35% marginal tax bracket: $2.12

The $8.00 is in play for 43 days from February 2, 2004 to about March 16, 2004 (giving a little time for the mail), then it is reduced to $3.50 for 48 days until sold on May 3, 2004 for $3.50. The average daily investment is therefore $5.63. Assuming the cash flows are -$8.00 to open, +$4.50 dividend, +$3.50 at sale and "tax savings" at 6/15/2004 estimated payment date, the "returns" are:

25% marginal tax bracket: $0.45 / $5.63 = 8% (IRR = 34.5%)
28% marginal tax bracket: $0.585 / $5.63 = 10.4% (IRR = 45.8%)
33% marginal tax bracket: $0.81 / $5.63 = 14.4% (IRR = 65.6%)
35% marginal tax bracket: $0.90 / $5.63 = 16% (IRR = 73.9%)

IRR = Internal Rate of Return

If the tax savings are considered to occur when the position is closed, the IRR values are 35.8%, 48.2%, 70.4% and 79.9% respectively.

What is the hole in this thinking?


To: Ira Player who wrote (4555)2/10/2004 3:04:32 PM
From: HIA  Read Replies (1) | Respond to of 5696
The dividend is payable to those who owned the stock on Feb 5. That means that someone could buy the stock on Feb 5, sell the stock on Feb 6, and they would receive the dividend when it is paid. That also means that the market demand for the stock should adjust the price of the stock on Feb 6. Since the price of the stock did not adjust for the dividend, the dividend appears to be a return-of-capital. In fact there is a company press release that casually mentions a return of capital.

A return of capital is not income but a reduction in the cost basis of the holding...

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