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1040 2010

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1040 2010

1040 2010 8. 1040 2010   Dividends and Other Distributions Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationDividends not reported on Form 1099-DIV. 1040 2010 Reporting tax withheld. 1040 2010 Nominees. 1040 2010 Ordinary DividendsQualified Dividends Dividends Used to Buy More Stock Money Market Funds Capital Gain DistributionsBasis adjustment. 1040 2010 Nondividend DistributionsLiquidating Distributions Distributions of Stock and Stock Rights Other DistributionsInformation reporting requirement. 1040 2010 Alternative minimum tax treatment. 1040 2010 How To Report Dividend IncomeInvestment interest deducted. 1040 2010 Reminder Foreign-source income. 1040 2010  If you are a U. 1040 2010 S. 1040 2010 citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U. 1040 2010 S. 1040 2010 law. 1040 2010 This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. 1040 2010 Introduction This chapter discusses the tax treatment of: Ordinary dividends, Capital gain distributions, Nondividend distributions, and Other distributions you may receive from a corporation or a mutual fund. 1040 2010 This chapter also explains how to report dividend income on your tax return. 1040 2010 Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. 1040 2010 You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. 1040 2010 However, some amounts you receive that are called dividends are actually interest income. 1040 2010 (See Dividends that are actually interest under Taxable Interest in chapter 7. 1040 2010 ) Most distributions are paid in cash (or check). 1040 2010 However, distributions can consist of more stock, stock rights, other property, or services. 1040 2010 Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 550 Investment Income and Expenses Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends General Information This section discusses general rules for dividend income. 1040 2010 Tax on unearned income of certain children. 1040 2010   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. 1040 2010 If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. 1040 2010 If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. 1040 2010    Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. 1040 2010 Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. 1040 2010   For more information about the tax on unearned income of children and the parents' election, see chapter 31. 1040 2010 Beneficiary of an estate or trust. 1040 2010    Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. 1040 2010 You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. 1040 2010 , from the fiduciary. 1040 2010 Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. 1040 2010 Social security number (SSN) or individual taxpayer identification number (ITIN). 1040 2010    You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. 1040 2010 This includes payers of dividends. 1040 2010 If you do not give your SSN or ITIN to the payer of dividends, you may have to pay a penalty. 1040 2010 For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. 1040 2010 Backup withholding. 1040 2010   Your dividend income is generally not subject to regular withholding. 1040 2010 However, it may be subject to backup withholding to ensure that income tax is collected on the income. 1040 2010 Under backup withholding, the payer of dividends must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. 1040 2010   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. 1040 2010 For more information, see Backup Withholding in chapter 4. 1040 2010 Stock certificate in two or more names. 1040 2010   If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person's share of any dividends from the stock is determined by local law. 1040 2010 Form 1099-DIV. 1040 2010   Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. 1040 2010 Keep this form with your records. 1040 2010 You do not have to attach it to your tax return. 1040 2010 Dividends not reported on Form 1099-DIV. 1040 2010   Even if you do not receive Form 1099-DIV, you must still report all your taxable dividend income. 1040 2010 For example, you may receive distributive shares of dividends from partnerships or S corporations. 1040 2010 These dividends are reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040 2010 , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. 1040 2010 Reporting tax withheld. 1040 2010   If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld. 1040 2010 Nominees. 1040 2010   If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf. 1040 2010 Form 1099-MISC. 1040 2010   Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. 1040 2010 See Reporting Substitute Payments under Short Sales in chapter 4 of Publication 550 for more information about reporting these payments. 1040 2010 Incorrect amount shown on a Form 1099. 1040 2010   If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. 1040 2010 The new Form 1099 you receive will be marked “Corrected. 1040 2010 ” Dividends on stock sold. 1040 2010   If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income. 1040 2010 Dividends received in January. 1040 2010   If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. 1040 2010 You report the dividend in the year it was declared. 1040 2010 Ordinary Dividends Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. 1040 2010 They are paid out of earnings and profits and are ordinary income to you. 1040 2010 This means they are not capital gains. 1040 2010 You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. 1040 2010 Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive. 1040 2010 Qualified Dividends Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. 1040 2010 They should be shown in box 1b of the Form 1099-DIV you receive. 1040 2010 The maximum rate of tax on qualified dividends is: 0% on any amount that otherwise would be taxed at a 10% or 15% rate. 1040 2010 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39. 1040 2010 6%. 1040 2010 20% on any amount that otherwise would be taxed at a 39. 1040 2010 6% rate. 1040 2010 To qualify for the maximum rate, all of the following requirements must be met. 1040 2010 The dividends must have been paid by a U. 1040 2010 S. 1040 2010 corporation or a qualified foreign corporation. 1040 2010 (See Qualified foreign corporation , later. 1040 2010 ) The dividends are not of the type listed later under Dividends that are not qualified dividends . 1040 2010 You meet the holding period (discussed next). 1040 2010 Holding period. 1040 2010   You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. 1040 2010 The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. 1040 2010 Instead, the seller will get the dividend. 1040 2010   When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. 1040 2010 See the examples later. 1040 2010 Exception for preferred stock. 1040 2010   In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. 1040 2010 If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies. 1040 2010 Example 1. 1040 2010 You bought 5,000 shares of XYZ Corp. 1040 2010 common stock on July 9, 2013. 1040 2010 XYZ Corp. 1040 2010 paid a cash dividend of 10 cents per share. 1040 2010 The ex-dividend date was July 16, 2013. 1040 2010 Your Form 1099-DIV from XYZ Corp. 1040 2010 shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). 1040 2010 However, you sold the 5,000 shares on August 12, 2013. 1040 2010 You held your shares of XYZ Corp. 1040 2010 for only 34 days of the 121-day period (from July 10, 2013, through August 12, 2013). 1040 2010 The 121-day period began on May 17, 2013 (60 days before the ex-dividend date), and ended on September 14, 2013. 1040 2010 You have no qualified dividends from XYZ Corp. 1040 2010 because you held the XYZ stock for less than 61 days. 1040 2010 Example 2. 1040 2010 Assume the same facts as in Example 1 except that you bought the stock on July 15, 2013 (the day before the ex-dividend date), and you sold the stock on September 16, 2013. 1040 2010 You held the stock for 63 days (from July 16, 2013, through September 16, 2013). 1040 2010 The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2013, through September 14, 2013). 1040 2010 Example 3. 1040 2010 You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2013. 1040 2010 ABC Mutual Fund paid a cash dividend of 10 cents a share. 1040 2010 The ex-dividend date was July 16, 2013. 1040 2010 The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. 1040 2010 Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. 1040 2010 However, you sold the 10,000 shares on August 12, 2013. 1040 2010 You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days. 1040 2010 Holding period reduced where risk of loss is diminished. 1040 2010   When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions. 1040 2010 You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities. 1040 2010 You were grantor (writer) of an option to buy substantially identical stock or securities. 1040 2010 Your risk of loss is diminished by holding one or more other positions in substantially similar or related property. 1040 2010   For information about how to apply condition (3), see Regulations section 1. 1040 2010 246-5. 1040 2010 Qualified foreign corporation. 1040 2010   A foreign corporation is a qualified foreign corporation if it meets any of the following conditions. 1040 2010 The corporation is incorporated in a U. 1040 2010 S. 1040 2010 possession. 1040 2010 The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. 1040 2010 For a list of those treaties, see Table 8-1. 1040 2010 The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. 1040 2010 See Readily tradable stock , later. 1040 2010 Exception. 1040 2010   A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year. 1040 2010 Readily tradable stock. 1040 2010   Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. 1040 2010 For a list of the exchanges that meet these requirements, see www. 1040 2010 sec. 1040 2010 gov/divisions/marketreg/mrexchanges. 1040 2010 shtml. 1040 2010 Dividends that are not qualified dividends. 1040 2010   The following dividends are not qualified dividends. 1040 2010 They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV. 1040 2010 Capital gain distributions. 1040 2010 Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U. 1040 2010 S. 1040 2010 building and loan associations, U. 1040 2010 S. 1040 2010 savings and loan associations, federal savings and loan associations, and similar financial institutions. 1040 2010 (Report these amounts as interest income. 1040 2010 ) Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year. 1040 2010 Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation. 1040 2010 Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. 1040 2010 Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. 1040 2010 Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. 1040 2010 Table 8-1. 1040 2010 Income Tax Treaties Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. 1040 2010 Australia Indonesia Romania Austria Ireland Russian Bangladesh Israel Federation Barbados Italy Slovak Belgium Jamaica Republic Bulgaria Japan Slovenia Canada Kazakhstan South Africa China Korea Spain Cyprus Latvia Sri Lanka Czech Lithuania Sweden Republic Luxembourg Switzerland Denmark Malta Thailand Egypt Mexico Trinidad and Estonia Morocco Tobago Finland Netherlands Tunisia France New Zealand Turkey Germany Norway Ukraine Greece Pakistan United Hungary Philippines Kingdom Iceland Poland Venezuela India Portugal     Dividends Used to Buy More Stock The corporation in which you own stock may have a dividend reinvestment plan. 1040 2010 This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. 1040 2010 Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. 1040 2010 If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income. 1040 2010 If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date. 1040 2010 You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. 1040 2010 But you may be able to deduct the service charge. 1040 2010 See chapter 28 for more information about deducting expenses of producing income. 1040 2010 In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. 1040 2010 If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. 1040 2010 When figuring this amount, use the fair market value of the stock on the dividend payment date. 1040 2010 Money Market Funds Report amounts you receive from money market funds as dividend income. 1040 2010 Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest. 1040 2010 Capital Gain Distributions Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). 1040 2010 They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT. 1040 2010 Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT. 1040 2010 Undistributed capital gains of mutual funds and REITs. 1040 2010    Some mutual funds and REITs keep their long-term capital gains and pay tax on them. 1040 2010 You must treat your share of these gains as distributions, even though you did not actually receive them. 1040 2010 However, they are not included on Form 1099-DIV. 1040 2010 Instead, they are reported to you in box 1a of Form 2439. 1040 2010   Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), column (h), line 11. 1040 2010   The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. 1040 2010 You take credit for this tax by including it on Form 1040, line 71, and checking box a on that line. 1040 2010 Attach Copy B of Form 2439 to your return, and keep Copy C for your records. 1040 2010 Basis adjustment. 1040 2010   Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid. 1040 2010 Additional information. 1040 2010   For more information on the treatment of distributions from mutual funds, see Publication 550. 1040 2010 Nondividend Distributions A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. 1040 2010 You should receive a Form 1099-DIV or other statement showing the nondividend distribution. 1040 2010 On Form 1099-DIV, a nondividend distribution will be shown in box 3. 1040 2010 If you do not receive such a statement, you report the distribution as an ordinary dividend. 1040 2010 Basis adjustment. 1040 2010   A nondividend distribution reduces the basis of your stock. 1040 2010 It is not taxed until your basis in the stock is fully recovered. 1040 2010 This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. 1040 2010 If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. 1040 2010   When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. 1040 2010 Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. 1040 2010 See Holding Period in chapter 14. 1040 2010 Example. 1040 2010 You bought stock in 2000 for $100. 1040 2010 In 2003, you received a nondividend distribution of $80. 1040 2010 You did not include this amount in your income, but you reduced the basis of your stock to $20. 1040 2010 You received a nondividend distribution of $30 in 2013. 1040 2010 The first $20 of this amount reduced your basis to zero. 1040 2010 You report the other $10 as a long-term capital gain for 2013. 1040 2010 You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years. 1040 2010 Liquidating Distributions Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. 1040 2010 These distributions are, at least in part, one form of a return of capital. 1040 2010 They may be paid in one or more installments. 1040 2010 You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9. 1040 2010 For more information on liquidating distributions, see chapter 1 of Publication 550. 1040 2010 Distributions of Stock and Stock Rights Distributions by a corporation of its own stock are commonly known as stock dividends. 1040 2010 Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. 1040 2010 Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return. 1040 2010 Taxable stock dividends and stock rights. 1040 2010   Distributions of stock dividends and stock rights are taxable to you if any of the following apply. 1040 2010 You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights. 1040 2010 The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders. 1040 2010 The distribution is in convertible preferred stock and has the same result as in (2). 1040 2010 The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders. 1040 2010 The distribution is on preferred stock. 1040 2010 (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right. 1040 2010 )   The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities. 1040 2010 If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income. 1040 2010 Preferred stock redeemable at a premium. 1040 2010   If you hold preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. 1040 2010 For more information, see chapter 1 of Publication 550. 1040 2010 Basis. 1040 2010   Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. 1040 2010 If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550 for information on how to figure their basis. 1040 2010 Fractional shares. 1040 2010    You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. 1040 2010 However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued but instead are sold, and the cash proceeds are given to the shareholders. 1040 2010 Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. 1040 2010 Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. 1040 2010 Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate. 1040 2010    Report these transactions on Form 8949 with the correct box checked. 1040 2010   For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Publication 550. 1040 2010 Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). 1040 2010 Example. 1040 2010 You own one share of common stock that you bought on January 3, 2004, for $100. 1040 2010 The corporation declared a common stock dividend of 5% on June 29, 2013. 1040 2010 The fair market value of the stock at the time the stock dividend was declared was $200. 1040 2010 You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. 1040 2010 You figure your gain or loss as follows: Fair market value of old stock $200. 1040 2010 00 Fair market value of stock dividend (cash received) +10. 1040 2010 00 Fair market value of old stock and stock dividend $210. 1040 2010 00 Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) $95. 1040 2010 24 Basis (cost) of stock dividend (($10 ÷ $210) × $100) + 4. 1040 2010 76 Total $100. 1040 2010 00 Cash received $10. 1040 2010 00 Basis (cost) of stock dividend − 4. 1040 2010 76 Gain $5. 1040 2010 24 Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain. 1040 2010 Scrip dividends. 1040 2010   A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. 1040 2010 The certificate is generally nontaxable when you receive it. 1040 2010 If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate. 1040 2010   However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. 1040 2010 You must include its fair market value in income on the date you receive it. 1040 2010 Other Distributions You may receive any of the following distributions during the year. 1040 2010 Exempt-interest dividends. 1040 2010   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. 1040 2010 Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. 1040 2010 Information reporting requirement. 1040 2010   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. 1040 2010 This is an information reporting requirement and does not change the exempt-interest dividends to taxable income. 1040 2010 Alternative minimum tax treatment. 1040 2010   Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. 1040 2010 See Alternative Minimum Tax (AMT) in chapter 30 for more information. 1040 2010 Dividends on insurance policies. 1040 2010    Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. 1040 2010 However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company. 1040 2010    If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. 1040 2010 Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. 1040 2010 Report any taxable distributions on insurance policies on Form 1040, line 21. 1040 2010 Dividends on veterans' insurance. 1040 2010   Dividends you receive on veterans' insurance policies are not taxable. 1040 2010 In addition, interest on dividends left with the Department of Veterans Affairs is not taxable. 1040 2010 Patronage dividends. 1040 2010   Generally, patronage dividends you receive in money from a cooperative organization are included in your income. 1040 2010   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 in your business. 1040 2010 But you must reduce the basis (cost) of the items bought. 1040 2010 If the dividend is more than the adjusted basis of the assets, you must report the excess as income. 1040 2010   These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative. 1040 2010 Alaska Permanent Fund dividends. 1040 2010    Do not report these amounts as dividends. 1040 2010 Instead, report these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3. 1040 2010 How To Report Dividend Income Generally, you can use either Form 1040 or Form 1040A to report your dividend income. 1040 2010 Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. 1040 2010 Report qualified dividends on line 9b of Form 1040 or Form 1040A. 1040 2010 If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. 1040 2010 See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. 1040 2010 If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. 1040 2010 You cannot use Form 1040EZ if you receive any dividend income. 1040 2010 Form 1099-DIV. 1040 2010   If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. 1040 2010 Even if you do not receive Form 1099-DIV, you must report all your dividend income. 1040 2010   See Form 1099-DIV for more information on how to report dividend income. 1040 2010 Form 1040A or 1040. 1040 2010    You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040, if: Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or You received, as a nominee, dividends that actually belong to someone else. 1040 2010 If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III. 1040 2010   List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer's name and the ordinary dividends you received. 1040 2010 If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. 1040 2010 If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited. 1040 2010   Enter on line 6 the total of the amounts listed on line 5. 1040 2010 Also enter this total on line 9a of Form 1040A or 1040. 1040 2010 Qualified dividends. 1040 2010   Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. 1040 2010 The amount in box 1b is already included in box 1a. 1040 2010 Do not add the amount in box 1b to, or substract it from, the amount in box 1a. 1040 2010   Do not include any of the following on line 9b. 1040 2010 Qualified dividends you received as a nominee. 1040 2010 See Nominees under How to Report Dividend Income in chapter 1 of Publication 550. 1040 2010 Dividends on stock for which you did not meet the holding period. 1040 2010 See Holding period , earlier under Qualified Dividends. 1040 2010 Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. 1040 2010 Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. 1040 2010 Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. 1040 2010   If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. 1040 2010 Enter qualified dividends on line 2 of the worksheet. 1040 2010 Investment interest deducted. 1040 2010   If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. 1040 2010 Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. 1040 2010 This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. 1040 2010 For more information about the limit on investment interest, see Investment expenses in chapter 23. 1040 2010 Expenses related to dividend income. 1040 2010   You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). 1040 2010 See chapter 28 for general information about deducting expenses of producing income. 1040 2010 More information. 1040 2010    For more information about how to report dividend income, see chapter 1 of Publication 550 or the instructions for the form you must file. 1040 2010 Prev  Up  Next   Home   More Online Publications
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The 1040 2010

1040 2010 2. 1040 2010   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. 1040 2010 ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. 1040 2010 In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. 1040 2010 Those cases are called “abusive tax shelters. 1040 2010 ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. 1040 2010 Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . 1040 2010 Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 1040 2010 Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. 1040 2010 They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. 1040 2010 Despite appearances to the contrary, the taxpayer generally risks little. 1040 2010 Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. 1040 2010 Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. 1040 2010 (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. 1040 2010 ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. 1040 2010 This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. 1040 2010 Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. 1040 2010 However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. 1040 2010 Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. 1040 2010 These provisions include the following. 1040 2010 Disclosure of reportable transactions. 1040 2010   You must disclose information for each reportable transaction in which you participate. 1040 2010 See Reportable Transaction Disclosure Statement , later. 1040 2010   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. 1040 2010 To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. 1040 2010   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. 1040 2010 They must provide this number to all persons to whom they acted as a material advisor. 1040 2010 They must provide the number at the time the transaction is entered into. 1040 2010 If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. 1040 2010 For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. 1040 2010 Requirement to maintain list. 1040 2010   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. 1040 2010 The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. 1040 2010 See Regulations section 301. 1040 2010 6112-1 for more information (including what information is required to be included on the list). 1040 2010 Confidentiality privilege. 1040 2010   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. 1040 2010 Appraisal requirement for donated property. 1040 2010   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. 1040 2010 If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. 1040 2010 If you file electronically, see Form 8453, U. 1040 2010 S. 1040 2010 Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. 1040 2010 For more information about appraisals, including exceptions, see Publication 561. 1040 2010 Passive activity loss and credit limits. 1040 2010   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. 1040 2010 For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. 1040 2010 Interest on penalties. 1040 2010   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. 1040 2010 Accounting method restriction. 1040 2010   Tax shelters generally cannot use the cash method of accounting. 1040 2010 Uniform capitalization rules. 1040 2010   The uniform capitalization rules generally apply to producing property or acquiring it for resale. 1040 2010 Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. 1040 2010 For more information, see Publication 538. 1040 2010 Denial of deduction for interest on an underpayment due to a reportable transaction. 1040 2010   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. 1040 2010 This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. 1040 2010 Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. 1040 2010 The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. 1040 2010 Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. 1040 2010 So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. 1040 2010 In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. 1040 2010 The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. 1040 2010 Investor Reporting You may be required to file a reportable transaction disclosure statement. 1040 2010 Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. 1040 2010 Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. 1040 2010 Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). 1040 2010 In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. 1040 2010  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. 1040 2010 If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. 1040 2010 If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. 1040 2010 See Penalty for failure to disclose a reportable transaction , later under Penalties. 1040 2010 The following discussion briefly describes reportable transactions. 1040 2010 For more details, see the Instructions for Form 8886. 1040 2010 Reportable transaction. 1040 2010   A reportable transaction is any of the following. 1040 2010 A listed transaction. 1040 2010 A confidential transaction. 1040 2010 A transaction with contractual protection. 1040 2010 A loss transaction. 1040 2010 A transaction of interest entered into after November 1, 2006. 1040 2010 Note. 1040 2010 Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. 1040 2010 Listed transaction. 1040 2010   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. 1040 2010 These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. 1040 2010 For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. 1040 2010 irs. 1040 2010 gov/irb/2009-31_IRB/ar07. 1040 2010 html. 1040 2010 Confidential transaction. 1040 2010   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. 1040 2010 A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. 1040 2010 The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. 1040 2010 Transaction with contractual protection. 1040 2010   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. 1040 2010 For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. 1040 2010 irs. 1040 2010 gov/irb/2007-07_IRB/ar15. 1040 2010 html. 1040 2010 Loss transaction. 1040 2010   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. 1040 2010 A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. 1040 2010   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. 1040 2010 For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. 1040 2010 irs. 1040 2010 gov/irb/2004-50_IRB/ar11. 1040 2010 html. 1040 2010 Transaction of interest. 1040 2010   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. 1040 2010 The IRS has identified the following transactions of interest. 1040 2010 “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. 1040 2010 R. 1040 2010 B. 1040 2010 545, available at www. 1040 2010 irs. 1040 2010 gov/irb/2007-36_IRB/ar20. 1040 2010 html. 1040 2010 Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. 1040 2010 R. 1040 2010 B. 1040 2010 544, available at www. 1040 2010 irs. 1040 2010 gov/irb/2007-36_IRB/ar19. 1040 2010 html. 1040 2010 Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. 1040 2010 R. 1040 2010 B. 1040 2010 1194, available at www. 1040 2010 irs. 1040 2010 gov/irb/2008-47_IRB/ar11. 1040 2010 html. 1040 2010 Certain transactions involving a U. 1040 2010 S. 1040 2010 taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. 1040 2010 R. 1040 2010 B. 1040 2010 312, available at www. 1040 2010 irs. 1040 2010 gov/irb/2009-03_IRB/ar10. 1040 2010 html. 1040 2010   For updates to this list, go to www. 1040 2010 irs. 1040 2010 gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. 1040 2010 Penalties Investing in an abusive tax shelter may lead to substantial expenses. 1040 2010 First, the promoter generally charges a substantial fee. 1040 2010 If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. 1040 2010 You may also be subject to the penalty for failure to pay tax. 1040 2010 These penalties are explained in the following paragraphs. 1040 2010 Accuracy-related penalties. 1040 2010   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). 1040 2010 Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. 1040 2010 Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. 1040 2010   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. 1040 2010   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). 1040 2010 Negligence or disregard of rules or regulations. 1040 2010   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. 1040 2010 The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. 1040 2010    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. 1040 2010 It also includes any failure to keep adequate books and records. 1040 2010 A return position that has a reasonable basis is not negligence. 1040 2010   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. 1040 2010   The penalty for disregard of rules and regulations can be avoided if all the following are true. 1040 2010 You keep adequate books and records. 1040 2010 You have a reasonable basis for your position on the tax issue. 1040 2010 You make an adequate disclosure of your position. 1040 2010 Use Form 8275 to make your disclosure and attach it to your return. 1040 2010 To disclose a position contrary to a regulation, use Form 8275-R. 1040 2010 Use Form 8886 to disclose a reportable transaction (discussed earlier). 1040 2010 Substantial understatement of tax. 1040 2010   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. 1040 2010 An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. 1040 2010 The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. 1040 2010   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. 1040 2010 In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. 1040 2010 Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. 1040 2010   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. 1040 2010 An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. 1040 2010 Substantial valuation misstatement. 1040 2010   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. 1040 2010 The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. 1040 2010 You underpaid your tax by more than $5,000 because of the misstatement. 1040 2010 You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. 1040 2010   You may be assessed a penalty of 40% for a gross valuation misstatement. 1040 2010 If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. 1040 2010 The penalty rate is also 40% if the property's correct value or adjusted basis is zero. 1040 2010 Transaction lacking economic substance. 1040 2010   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. 1040 2010 For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. 1040 2010   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. 1040 2010   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. 1040 2010   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. 1040 2010 Relevant facts include any facts affecting the tax treatment of the transaction. 1040 2010    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. 1040 2010 Undisclosed foreign financial asset understatement. 1040 2010   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. 1040 2010 An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. 1040 2010 The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. 1040 2010 Any foreign business you control, reportable on Form 5471, Information Return of U. 1040 2010 S. 1040 2010 Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. 1040 2010 S. 1040 2010 Persons With Respect to Certain Foreign Partnerships. 1040 2010 Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. 1040 2010 S. 1040 2010 Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. 1040 2010 Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. 1040 2010    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. 1040 2010 See the Instructions for Form 8938 for details. 1040 2010    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. 1040 2010 Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. 1040 2010 Penalty for incorrect appraisals. 1040 2010   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. 1040 2010 For details on the penalty amount and exceptions, see Publication 561. 1040 2010 Penalty for failure to disclose a reportable transaction. 1040 2010   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). 1040 2010 For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). 1040 2010 This penalty is in addition to any other penalty that may be imposed. 1040 2010   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. 1040 2010 For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. 1040 2010 irs. 1040 2010 gov/irb/2007-09_IRB/ar12. 1040 2010 html. 1040 2010 Accuracy-related penalty for a reportable transaction understatement. 1040 2010   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. 1040 2010 This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. 1040 2010 The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. 1040 2010 You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. 1040 2010 The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. 1040 2010   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. 1040 2010 Civil fraud penalty. 1040 2010   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. 1040 2010 Joint return. 1040 2010   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. 1040 2010 Failure to pay tax. 1040 2010   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. 1040 2010 Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. 1040 2010 Prev  Up  Next   Home   More Online Publications