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I am still confused about Dolby's price drop. So the key to really making a $4 special dividend would be to add to your position the last day of being on record for this dividend. Will there be a sell off tomorrow morning from investors that just wanted to be on record for one day and get the dividend?

I am a new investor, any insight would be appreciated. ck


No matter when you purchase, the special dividend doesn't give you anything "more". If you purchase before the ex-dividend date and receive the dividend, the value after the dividend plus the cash value of the dividend equals the value before the dividend.

If you just bought the stock for one day to get the dividend and sold it immediately afterward, you would have a $4 dividend that would not qualify for the reduced tax rates because you didn't own the shares long enough. This would be offset by a $4 short-term capital loss. Although reported on different lines of the tax return the net result is no additional income and no additional tax.

However, there is a lesser known provision in the tax code that operates to prevent tax rate arbitrage. If you held the shares long enough (61 days around the ex-dividend date) for the dividend to qualify for the reduced capital gains tax rate and sold the share for the $4 loss, you would think that you would have a dividend taxed at long-term capital rates but a loss taxed at short-term (regular) rates. This would provide a benefit due to the difference between capital and regular tax rates. Congress thought of this and you have to treat the loss as a long-term loss. See IRC 1(h)11(D)(ii). This means that the loss and dividend receive the same tax treatment and again there is no net gain or tax. This treatment only applies to "extraordinary" dividends which are defined as those which exceed 10% of an investor's adjusted basis in the security.

Ira
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