I'm still a bit confused. However, you have helped to educate me by forcing me to refresh myself on what a RIC (Regulated Investment Company) is. If I ever set one up, I now know what tax form to file -- 1120-RIC. BDC's, of which I own several, are RICs. KF though not a BDC appears to qualify as a RIC by being a management company or unit investment trust.
From what I read in the IRS documents, it would appear that the RIC laws to which you referred are more applicable to KF managment than to me as a stockholder. From the IRS document: " A RIC that is the holder of record on the record date for a dividend payable on that stock must include the dividend in gross income by the later of: the date the share became ex-dividend or the date the RIC acquired the share."
I am a relative novice at investing but I am always trying to learn. I own only 100 shares of KF. To me this represnnts a meaningful amount of money, currently $4,744. I am planning to buy more shares of this stock at the after-dividend-payment reduced rate. I was considering purchasing the additional amount in a taxable account.
Though I do hold this stock in an IRA account now, help me understand the rationale for "dumping before the dividend to avoid taxes" in a taxable account. Potentially, there still would be tax on the capital gain from the sale if it were purchased in a taxable account. For me it would be a short term capital gain because I have owned the stock for less than a year.
This particularly large dividend ($15.94)is primarily a long term capital gain ($15.82) with $.12 of short term capital gain.
The record date is Oct. 26. Presmuably, if I were to sell the stock on Oct 27, I still am entitled to the dividend. I just don't understand the reason for having an ex-dividend date follow the "record date" since the ex-dividend date usually preceeds the record date (usually by three work days).
Maybe it is the KF's management that is doing the dumping to avoid paying the taxes based on the requirements to qualify as a RIC.
This is an unusual distribution because of its size. Originally KF set the ex-date on 10/24 and the record date on 10/26. Incidentally, the reason the record date is usually 2 days after the ex-date is because that's when the stock settles. The record and settle dates are the same. After the initial press release, the NYSE (where KF is listed) called the fund to inform it that distributions that exceed 20% of the trading price are handled differently. Thus, the weird ex-date.
If you want the dividend, <b>DO NOT SELL YOUR STOCK BEFORE THE NOVEMBER 29TH EX-DATE<b>. That's only IF you wish to receive the dividend.
After the record date, the stock will trade with a thing called a "due bill" attached to it. That is, if you sell the stock any time <i>after</i> the 10/26 record date but <i>before</i> the November 29th ex-date, the buyer will receive the distribution and you will pay the distribution.
This is not an ordinary distribution and it's very confusing. To receive the distribution, you can sell your stock no earlier than 11/29.
I don't know why the other poster said that. I'm not sure I agree. If you're a regular investor, you may dump the stock to avoid the taxes on the distribution because you may not be able to us the capital loss on the stock to offset the tax liability created by the dividend if you've maxed out your 3K loss limit for the year. And you are correct in thinking that the sale itself may create a capital gain which then creates a tax liability.
But long term capital gains distributions sort of create a tax arbitrage. That is, you still take a capital loss on the stock by the amount of the distribution but you pay a long term capital gains rate even if you only held the stock for a few days.