Closed End Fund Preferreds Dividends-Updated

Long time reader Larry M brings up the question of whether CEF dividends are qualified or not.

Currently we have 1/2 of them marked as YES–QUALIFIED. We have done a bunch of research tonight and since they are organized as RICs (registered investment companies) and thus pay no income taxes we believe we are WRONG and will be changing all of the pages of those individual issues to NOT QUALIFIED.

As near as we can tell–and we are now 90% convinced – that they pay ordinary income and ROC (return of capital). Of course the ROC is not an issue for most investors but the ordinary/qualified distribution question affects those holding these securities in taxable accounts.

Unfortunately the topic is maybe not as cut and dried as it may seem as we have found a few CEFs that claim some portion of there distributions as “qualified”–but yet they pay not income taxes which would seem to preclude any qualified distributions.

It is our recommendation that investors consider CEF dividends as ordinary income unless confirmed otherwise directly with the particular CEF.

We have corrected security pages to non-qualified.

11 thoughts on “Closed End Fund Preferreds Dividends-Updated”

  1. QOL has changed the “15% Tax Rate?” of all 4 preferreds that I mentioned, from “Yes” to “Variable” and includes this boilerplate in each “SECURITY DESCRIPTION”: Dividends paid by preferreds issued by closed-end funds can be 0% to 100% eligible for the preferential income tax rate of 15% to a maximum of 20% depending on the holder’s tax bracket (and under IRS specified holding restrictions) and can also be 0% to 100% eligible for the dividends received deduction for corporate holders (see page 60 of the prospectus for further information).

    In other words “read the prospectus and guess for yourself”.

    I never got any reply from Allianz on the NCV-A and NCZ-A.

  2. CEFs pass through income in the same form as the individual holdings. For example, my 1099 for FPF shows about 75% QDI and the balance ordinary dividends (plus some non-dividend return)

    1. Thanks Bob-in-DE—yes I think this is a more complex topic and each individual issue can vary. I hold many of them, but all in tax deferred accounts.

  3. Tim, Thought this might be useful. Using NCZ – from the NCZ-A prospectus:

    The distributions with respect to the Series A Preferred Shares…will constitute dividends to the extent of the Fund’s current or accumulated earnings and profits, as calculated for federal income tax purposes. Such dividends generally will be taxable as ordinary income to holders. Distributions of net capital gains…will be treated as long-term capital gains in the hands of holders receiving such distributions. The IRS currently requires that a RIC that has two or more classes of stock allocate to each such class proportionate amounts of each type of the RIC’s income (such as ordinary income and capital gains) based upon the percentage of total dividends distributed to each class for the tax year. Accordingly, the Fund intends each year to allocate capital gain dividends between and among its Common Shares and each series of its Preferred Shares, including the Series A Preferred Shares, in proportion to the total dividends paid to each class during or with respect to such year. Ordinary income dividends and dividends qualifying for the dividends received deduction, if any, will similarly be allocated between and among such share classes.

    From the AllianzGI site:
    AllianzGI Convertible & Income Fund II (NYSE: NCZ)
    2018 Tax Reporting Information
    Total dividends paid in 2018 (per share): $0.690000
    Long-Term Capital Gains $0.000000
    Ordinary Income $0.421212
    Return of Capital $0.268788
    Qualified Dividend Income $0.142871

    33.92% of the income dividends paid by the Fund qualify for the corporate dividend received deduction.

    Though also from the prospectus:
    The Fund may report certain dividends as derived from “qualified dividend income,” which, when received by a non-corporate shareholder, will be taxed at the rates applicable to net capital gain, provided “holding period” and other requirements are met at both the shareholder and Fund levels.

    The tax reporting numbers are for the stock though the same allocation percentages apply to the pfd. Though treated as a RIC, appears a portion of dividends remain qualified. And appears the holding period requirements still apply to the dividends derived as qualified income.

  4. Tim, I was looking back at old 1099’s for distributions on other CEF preferreds that I’ve owned. The only one I can find is the monthly dividends paid by TYG-PB (issued by Tortoise Energy Infrastructure CEF) – they were 100% QDI from the time I purchased it in mid 2014, until it was redeemed in 2016. Quantum is acting funny right now, I can’t get to its prospectus (or any other) to see what it said about tax considerations.

    Also of note is that there was never any “holding period” consideration, as had been mentioned in the other thread. All the distributions that I received were reported as fully QDI.

    1. Hi Larry–it is becoming obvious that there is no certain answer to your question. The IRS lists a holding period requirement–maybe these things are too complex for them to deal with on an individual basis.

      1. I don’t want to drag the discussion off the main topic of CEF preferred dividend taxation, but I would like to hear from anyone who gets taxable dividends and actually understands this “holding period” business which I’ve just done a little reading about.

        I’ve been collecting taxable common stock and mutual fund dividends for a long, long time. They’ve always been reported as QDI and that goes straight onto my tax form. No matter when I bought or sold the shares.

        No one – no articles, no tax software – ever suggested that every dividend that was reported to me as QDI, needs to be scrutinized for a holding period requirement (and presumably reclassified as ordinary income if it wasn’t met). Does anyone actually DO this?

        1. Too me, that is a tremendous amount of work. Taxes already take way too much time, and my time is very valuable. Life is too short already. I just read the data and forms (export it) from broker, and move ahead.

          1. Agree completely. However when I initially asked about the way that NCV-A and NCZ-A dividends had been split up QDI/NQDI, it was immediately suggested that my holding period might be causing this. That’s not the case here – Allianz suggested in their prospectuses that the income would be split QDI/NQDI. I noticed it early on but wanted to see how their dividends were ultimately reported on my 1099.

            “Holding period” for QDI (from all types of securities) seems like a technicality that nobody pays any attention to. Until someone speaks up to the contrary. It seems like the “dividend capture” people would get bitten by this quite often.

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