NCT: tax treatment of NRZ distributed shares. Concern?
"Impact of Distribution on Newcastle Stockholders (Press Release June 17)
For U.S. federal income tax purposes, Newcastle’s distributions (including cash dividends and stock distributions, which include the Distributed Shares) in any year are treated as ordinary taxable dividends to the extent of its earnings and profits (“E&P”). The distribution of the Distributed Shares creates E&P for 2013 equal to approximately $2.40 per share, which is equal to the fair market value of the Distributed Shares ($6.89 per share) less Newcastle’s tax basis in New Residential’s assets ($4.49 per share).
The taxability of the Distributed Shares will be determined in the context of all Newcastle E&P and distributions, which will not be known until early 2014. However, solely for illustration purposes, if the taxability of the Distributed Shares was determined on a standalone basis, the following treatment would apply:
• $2.40 per share would be ordinary taxable income
• The lesser of $4.49 and the Record Holder’s tax basis in their Newcastle shares would be a non-taxable return of capital
• If $4.49 exceeds a Record Holder’s tax basis in their Newcastle common stock, the excess will generally be treated as capital gain."
CONCERN: If I understand this correctly, E&P for 2013 will raise or lower the 2.40 per share of 2013 ordinary taxable income to NCT shareholders. Does anyone have any estimates for what the E&P might be for 2013, positive or negative? I assume the E&P is actual REIT taxable income, not AFFO or CAD, etc., so it oculd be a negative number? and I don't know what one-time extraordinary items might possibly lower this also?. That would certainly be a help short term, I suppose. Also, will not the $2.40 per share distribution dividend be added to their regular total annual dividend for 2013 which presumably gets it up around $3 total ordinary div total. WOW. Comments please on div tax liability? What do you all think?
I would rather it be taxable than not be taxable. By being taxable, I have comfort in knowing that the company is earning earnings and profits. Earnings and profits is a little different that taxable income, but for our purposes, it might as well be the same. When distributions are not taxable, then I might be concerned that GAAP earnings are only paper earnings. Taxable income to me is more of a secure sign.
I own it in a Roth IRA account. The only thing I have to worry about is UBTI and that isn't an issue here. It's going to be tax hell (with revised submissions) for those with NCT in taxable accounts. Hope your broker gets it right.