Question

In June of the current year, Marigold Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on August 1. Ellen and Tim each purchase 100 shares of Marigold stock on July 1. On July 15, Ellen also purchases a short position in Marigold. Tim sells 50 of his shares on August 10 and continues to hold the remaining 50 shares through the end of the year. Ellen closes her short position in Marigold on October 15. With respect to the dividends, which of the following is correct?a. Ellen will have $400 of qualifying dividends subject to reduced tax rates and $400 of ordinary income (from dividends paid on the short position of Marigold stock). b. Tim will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income. c. All $800 of Ellen's dividends will qualify for reduced tax rates. d. All $400 of Tim's dividends will qualify for reduced tax rates. e. None of the above.

Answer 1

Answer:

b. Tim will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income.

Explanation:

Ellen's short sale of stocks will not qualify for dividends at reduced tax rates. For Tim since the holding period for 50 shares is less than the qualifying days only the other 50 which were held till the ex dividend rate will be taxed at reduced rates.