Even if a "return of capital" payment is not listed on your Form 1099, you may still have one!
This situation may occur when you buy a stock between the record date and the ex-dividend
date. For small dividends, you can ignore this aspect, but for large special dividends it is
worthwhile to make the adjustment. For instance, look at the recent Warner Chilcott
(Nasdaq:WCRX) $8.50 special dividend with a record date of 8/30/2010, a payable date of
9/8/2010, and an ex-date of 9/9/2010.
Note that the ex-date was changed by the Nasdaq stock exchange from the normal ex-date
of 8/28/2010 (two days before the record date) to 9/9/2010 (the day after the pay date) so
that the stock will trade with a "due bill" from 8/30/2010 through 9/8/2010. This was done
according to stock exchange rules because the dividend represented more than 25% of the
stock price per share. It draws attention to the large upcoming dividend so that the market
price will adjust to reflect fairly the appropriate value to the buyer and seller.
The purchaser during the ten-day period due bill period can reduce his cost basis by the
amount of the dividend he receives on 9/8/2010. The theory is that the buyer of a stock
with a large extraordinary dividend due bill attached actually acquired two assets: the
underlying stock plus the right to the extraordinary distribution. The receipt of the large
dividend is thus a return of capital because the market price of the stock ordinary falls by
the dividend amount on the ex-date to reflect only the value of the underlying stock. The
receipt of the dividend is essentially the return of the buyer's own money.
The broker/dealer should not report the payment as a taxable dividend on your Form 1099,
since it should be taxed to the previous owner of the stock on the record date. If the
broker/dealer reports the payment to you as a taxable dividend rather than return of capital,
you can attach an explanation statement to your tax return to report a reduction in the Form
1099-DIV taxable dividend amount and to reclassify it as a return of capital and adjustment
of basis.
Further discussion of the Warner-Chilcott extraordinary dividend can be found in
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