In August,Sunglow Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on October 1.Elaine and Tom each purchase 100 shares of Sunglow stock on September 1.On September 15,Elaine also purchases a short position in Sunglow.Tom sells 50 of his shares on October 15 and continues to hold the remaining 50 shares through the end of the year.Elaine closes her short position in Sunglow on December 119- With respect to the dividends,which of the following is correct?
A)Tom will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income.
B)Elaine will have $400 of qualifying dividends subject to reduced tax rates and $400 of ordinary income (from dividends paid on the short position of Sunglow stock).
C)All $800 of Elaine's dividends will qualify for reduced tax rates.
D)All $400 of Tom's dividends will qualify for reduced tax rates.
E)None of the above.

Question

Quizplus · Accepted Answer

Tom will receive $400 in dividends ($4 per share x 100 shares) and will have $200 of qualifying dividends subject to reduced tax rates (assuming he meets the holding period requirements), and $200 of ordinary income. Elaine will also receive $400 in dividends ($4 per share x 100 shares) but since she held a short position in Sunglow, she must pay the dividends paid on that position which would result in $400 of ordinary income.

In August,Sunglow Corporation Declares a $4 Dividend Out of E