Why are the dividends payable in 2007 by Cooper Industries, Ltd. treated for tax purposes as a return of capital to its shareholders?
A.
The tax treatment of dividends and other distributions by a company to its shareholders is determined by a company’s capital structure. Based on the current capital structure of Cooper Industries, Ltd., the dividends payable in 2007 are treated for tax purposes as a return of capital to our shareholders.
Q.
How are return of capital distributions to shareholders treated for tax purposes?
A.
Distributions treated as a return of capital are generally non-taxable and you must reduce your cost (or other basis) by this amount for determining gain or loss when you sell your stock. However, if the distributions you receive exceed the total of your cost (or other basis), you should report the excess as capital gains even though the Form 1099-DIV that you received from the Company shows the distributions as non-taxable. The following examples illustrate tax treatment of return of capital distributions. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING YOUR PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTIONS.
(a)
Assume that you paid $40 for one share of Cooper common stock and received return of capital distributions of $1 in 2007. The return of capital distributions would be non-taxable and would reduce the tax basis in your shares so the new tax basis in your shares would be $39.
Tax Basis in Share
$ 40
Return of Capital Distributions
($ 1)
New Tax Basis in Share
$ 39
Capital Gain Income
$ 0
(b)
Assume that you paid $40 for one share of Cooper common stock and received return of capital distributions of $45. Of the total return of capital distributions, $40 would be non-taxable and $5 would be reported as capital gains. The new tax basis in your share would be $0.
Tax Basis in Share
$ 40
Return of Capital Distributions
($ 45)
New Tax Basis in Share
$ 0
Capital Gain Income
$ 5
Q.
Where can I find further information regarding the tax treatment of return of capital distributions?
