Dividend status during TIRA rollover

Submitted by BruceM on Mon, 2021-04-26 15:24

I was asked about this the other day, and I’m having trouble finding a definitive answer, so thought I might post it here.

TIRA owner has 2,000 shares of LMT he’s been accumulating over the years in his TIRA. He officially retired in March along with already retired spouse, and they project household taxable income this year will be about $70K, as they have not yet began a pension or Social Security. TIRA owner would like to know if he can do a rollover on the 2,000 LMT shares to a taxable account on, say, May 24. The stock goes Ex-Dividend May 28, the record date is June 1 and pay-date June 25, and then transfer the same 2,000 shares back into the TIRA after June 25, meeting the 60 day once-per-12-month rule. If so, will the $5,200 in dividends be reported on the 1099-DIV for the taxable account? As I understand it, the IRS “Same Property” rule requires the 2,000 shares be returned regardless of their change in value. If so, the advantage of this strategy is these qualified dividends will be taxed at the 0% rate, assuming his taxable income (including the dividends) is under the $80,800 cap. for 2021.

Thanks

BruceM



Submitted by Alan - IRA critic on Mon, 2021-04-26 17:34

Hi Bruce. I cannot locate anything on point, but most likely the IRS has issued guidance on this at some point many years ago, and it wouldn’t fly. The easy part is that the broker should not report this dividend as qualified because the shares must be held (not in IRA) for over 60 days of a 121 day window. This isn’t possible while meeting the 60 day rollover deadline. The 1099 DIV would then show the dividend as ordinary.
As for the rest of the logic, the share price drops to reflect the dividend payment after the ex div date, so if all else is equal the share value would be less by that amount when rolled back. The same but more dramatic result would occur in a 2 of 1 stock split, so if client rolled back the same number of shares that were distributed, he would have extracted 50% of the value from the rollover. The dividend is much less dramatic, but the IRS should view this dividend as an intrinsic portion of the share value and should require both the shares and the dividend paid to be rolled back to the IRA in order to report a non taxable rollover. 
Another issue with all lind rollovers is that the 1099R and 5498 amounts will not match up unless the shares happen to be of identical value when rolled back. If client proceeded, he could report the ordinary dividend income from the 1099 DIV and report the rest as a 100% rollover of the 1099R. But if there is any IRS guidance on this situation, it’s possible that it would contemplate a partial taxable distribution equal to the dividend amount (as if he had just kept the shares equal to the dividend), but then also expected the dividend to be taxed as well, which would be double taxation. Therefore, since the reporting results and the IRS response to those results are both somewhat unpredictable, I suggest that client abandon this idea.
The more clear result is the 1099 DIV not showing qualified since the broker knows it was not held over 60 days outside the IRA. However, perhaps someone else can produce a specific cite on the distribution, dividend and roll back scenario.

Submitted by BruceM on Mon, 2021-04-26 18:56

I thought about the 60 day of the 121 day period beginning 60 days prior to the Ex-D date, but I assumed, perhaps mistakenly, this holding period wouldn’t be affected by where the stock was held, only that it was owned. This is the case, for example, with a wash sale, where buying replacement stock in an IRA within the 30 days of a loss sale in a taxable account, still would disallow the wash sale. Now, perhaps these are not comperable and the holding rules different for the Q.Dividend….but it is a good point.The valuation point you make is a good one, but the ‘same property’ is not the same as ‘same value’, which if that were the case, would get messy if shares of stock were what was transferred out and then back in again. Actually, the value over this period of the 2,000 shares + dividend would be consistent, the only difference would be where the value is held.So if your assessment is correct, and I suspect it may well be, then the $5,200 dividend would be included in box 1 of the 1099-DIV, but not in Box 1b? But if so, the dividend would be ‘separated’ from the shares, as under the ‘Same Property’, one could not transfer back into the TIRA the same number of shares and then some added cash….correct?What would make perhaps the most sense, is the $5,200 would be treated as a withdrawal and included on the 1099-R from the IRA custodian??But bottom line, I don’t think getting QDiv treatment is the right answer. If it were, I’d imagine you’d read about  this rollover scheme used in large TIRAs…and I’ve never seen this spoken to Thanks again. Good discussion.

Submitted by Alan - IRA critic on Mon, 2021-04-26 19:28

The IRA custodian is required to report the actual value of the shares upon distribution. If an in kind rollover is done with the value differing, it would be advisable for the taxpayer to include an explanatory statement since the IRS does not know that shares were distributed. And you are correct that if the shares and the cash dividend were rolled back, then the 1099 DIV would be ignored, and would also require an explanatory statement to explain why. 
Either way, I expect a 1099 DIV to be issued, most likely with no 1b value. While if the dividend cash is rolled back the 1099R could be backed out with an explanatory statement, it is less clear what should happen if the number of shares were rolled back and not the cash. In that case, a value was extracted in the midst of an IRA in kind rollover and the dividend should likely be reported as issued or this would be violate the spirit of the rollover rule as a non taxable transaction. 
I wonder if this situation is like the wash sales that took place involving IRA accounts for years until the IRS viewed the frequency as an abuse that had to be addressed. In this case of dividends, perhaps the IRS does not think people are doing this enough to trigger guidance that would be fairly complex since it would have to deal with both the dividend reporting and the rollover reporting.
Maybe Bruce Steiner or DMx who post here know of a citation from the IRS.
 

Submitted by David Mertz on Tue, 2021-04-27 00:34

The only thing I’ve found is a PLR (PLR 8229061) dealing with determining if a dividend with a record date *before* the distribution but paid after the distribution is part of the balance to the credit of an employee eligible to be rolled over (it was determined to be).  I’ve found nothing regarding a dividend record date and pay date after the distribution but before the rollover contribution.
I have heard of situations like this happening accidentally.  As in the case of the PLR, I lean toward the dividend as being attached to the interest in the shares and part of the property that needs to be rolled over to avoid it being treated as a distribution from the TIRA.  The thing that makes me a bit uncertain is that if cash was distributed and interest was earned while outside the IRA, only the cash amount of the distribution would be rolled over and the earnings outside the IRA would be taxable.  However, cash is fungible and stock shares are generally not fungible.

Submitted by BruceM on Tue, 2021-04-27 18:59

A Dividend is really corporate earnings that were part of the value of the shares before they were transferred and, at least in theory, the price of the stock dropped by the amount of the dividend per share, so, logically, should be part of the shares when returned to the IRA within the 60 day period….unless one holds a strict definition of ‘same property’ to be only the same number of shares. If so, then as mentioned, the dividend would be considered a withdrawal subject to ordinary income and the 10% penalty if not yet 59.5 (or another exception).

Submitted by Alan - IRA critic on Tue, 2021-04-27 20:45

That makes sense. Part of 1099R income not rolled over. So whether the dividend income is rolled over or not rolled over, any 1099 DIV should be backed out. But suppose that none of the distributions were intended to be rolled over at all………in those situations I think the 1099 DIV would be reported. It’s not clear where the treatment changes from backing out 1099 DIV income to reporting it.

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