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No. of Recommendations: 3
I'll tell you what I'd do if I were in your shoes. Mind you, this is a best guess, based on 1) the information given to you by NAT, 2) form 8621 and its instructions.

(But first an aside: I'd never heard of Form 8621. It isn't listed in the 1040 booklet as a form you can get by fax. It doesn't appear in the TaxWise program I used as a TCE volunteer. It does show up on the IRS website, of course, but then so a lot of other weird forms, like 2290EZ, Heavy Vehicle Use Tax Return for Filers with Single Vehicle. How do you people find investments that trigger forms like these? Good grief! I've added PFICs and QEFs to my list of investments to avoid like the plague, joining oil/gas pipeline partnerships.)

Ok, back to your problem. NAT told you that their earnings (and earnings retained from earlier years) were insufficient to support their distributions to shareholders. Consequently, only 47.01% of what you received is treated as a (taxable) dividend. The remaining 52.99% is a return of capital, which means they're giving you your own money back. A return of capital is not taxed, but instead reduces your basis. (But if they return enough capital to reduce your basis to zero, any subsequent return of capital is taxed as a capital gain. I assume that hasn't happened here...)

So - I would put $61 on line 1a. That's 47.01% of the $130 you received. I would put zero on line 1b, and so 1c is just $61, and is included on 1040 line 9, dividend income.

I would put zeros on lines 2a thru 2c. The company didn't have any capital gains. The missing $69, which is that return of capital, just reduces your basis in the stock. When you sell the stock, you'll essentially pay tax on this $69 - either as a short or long term gain, or as a smaller loss...

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Again, this is just a guess. It's what I'd do, and if an IRS man came calling, my explanation would be that it made sense to me. On the other hand, if you do it and subsequently wind up in a federal prison, I don't want to hear about it.

Lorenzo
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