August 08, 2018
Purpose of Form
Form 1099-DIV is used to report dividends and distributions paid to individuals and entities. Specifically, a Form 1099-DIV should be filed for each person:
_ To whom you have paid dividends (including capital gain dividends and exempt interest dividends) and other distributions on stock of $10 or more
_ For whom you have withheld and paid any foreign tax on dividends and distributions
_ For whom you have withheld any federal income tax on dividends under the backup withholding rules, or
_ To whom you have paid $600 or more as part of a liquidation
If a payment is made to a person, and at the time of making the payment you are unable to determine whether any portion of the payment should be considered as a dividend, and no such determination is made by the time that a Form 1099-DIV should be sent to the recipient (January 31), then the entire payment must be reported as a dividend.
What is a Dividend?
The Internal Revenue Code Section 6042 defines dividends. Generally speaking, there are two broad categories for dividends: Distributions made by corporations to its shareholders, and payments made by stockbrokers to any person as substitute for dividends. Of these two categories, distributions made by corporations are the most complex, as there are a few exceptions and special rules which apply to specific types of corporations and businesses.
a. Corporate Distributions as Dividends
Most distributions made by corporations are classified as dividends. In order for a corporate distribution to be identified as a dividend, it must be made to a corporate shareholder, and must be made A) out of its earnings and profits accumulated after February 28, 1913, or B) out of its earnings and profits of the taxable year1, without regard to the amount of earnings and profits at the time the distribution was made.
As a general rule of thumb, every corporate distribution is made out of earnings and profits, and is considered to be made from the most recently accumulated earnings and profits of the corporation. Thus, the vast majority of corporate distributions will be treated as dividends.
There are, of course, some exceptions and special rules which apply to certain distributions. Distributions paid by foreign corporations, or paid to a foreign corporation, nonresident alien, or a partnership not engaged in business in the United States are not dividends.
Distributions paid to policyholders as dividends from insurance companies are also not considered distributions. Although these distributions are referred to as “dividends” in other I.R.C. sections, they do not take on the same definition of “dividend” as is laid out in I.R.C. § 316 for purposes of filing Form 1099-DIV. There are also some special rules which identify a transaction as a dividend although it would not normally be classified as such. For corporations which are personal holding companies (as defined by I.R.C. § 542), the distribution of property to shareholders is classified as a dividend that must be reported on Form 1099-DIV. This includes any distributions of property which are made after the close of the taxable year, as well as distributions relating to deficiency dividends.
The term “dividend” also includes any distribution of property which constitutes a deficiency dividend as identified by I.R.C. § 860(f). This particular section deals with distributions of property made by a qualified investment entity on or after the date of a “determination” made by court orders and/or agreements, and before the filing of a claim for deficiency dividend deduction. Similarly, in the case of a regulated investment company which has a taxable year other than a calendar year, if the distribution by the company exceeds the company’s current and accumulated earnings and profits, the company’s current earnings and profits shall be allocated first to distributions and identified as dividends.
If you find yourself working with a personal holding company or a regulated investment company, then you will need to insure that you are correctly identifying distributions as dividends, as these special rules primarily apply to these types of businesses.
Prior to the passage of the American Taxpayer Relief Act of 2012, the ability to claim certain dividends as qualified dividends, and thus benefit from the 0% and 15% tax rates on those dividends, was in jeopardy. With the passage of this act, however, these beneficial tax rates have been extended through 2013.
In 2013, a new income tax bracket of 39.6% was added. This bracket applies to individuals who file single and earn more than $400,000, file married filing jointly or qualifying widow(er) and earn more than $450,000, file married filing separately and earn more than $225,000, or file head of household and earn more than $425,000. For those individuals that fall into this bracket, the capital gain tax rate is 20%.
Generally speaking, most distributions from corporations are identified as qualified dividends. However, there are many exceptions based on how long stock was held, deductible dividends paid on employer securities, etc. Be sure to review the qualified dividends section of the Form 1099-DIV instructions when classifying qualified dividends.
1 Pursuant to I.R.C. § 316, the corporation’s earnings and profits of the taxable year are computed at the close of the taxable year without diminution by reason of any distributions made during the taxable year.