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.

Question

Quizplus · Accepted Answer

Ellen's short position means that she borrowed shares of Marigold stock and sold them in the market. As a result, she will owe dividends to the owner of the shares she borrowed. Therefore, Ellen will have $400 of ordinary income (from dividends paid on the short position of Marigold stock) and no qualifying dividends subject to reduced tax rates.

Tim purchased 100 shares of Marigold stock before the record date of August 1, so he will receive the dividend of $4 per share or $400 total. Since Tim held his shares for more than 60 days before the ex-dividend date, his $400 of dividends will qualify for reduced tax rates. Therefore, Tim will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income.

In June of the Current Year, Marigold Corporation Declares a $4