What is a Non-dividend Distribution?

A couple of the stocks that I own made what are called a non-dividend distributions in 2014. This was reported to me on Form 1099-DIV in box 3 (Nondividend distributions). These distributions are not treated the same as ordinary (Box 1a) or qualified dividends (Box 1b). So this begs the question what is a non-dividend distribution?

I found the answer, on the website of one of the stocks that made a non -dividend distribution in 2014: Mattel, Inc. (Nasdaq: MAT). The third question in their FAQ is "What is a non-dividend distribution?"

A non-dividend distribution represents a return of a portion of the shareholder’s original investment in the stock of a corporation. Generally, for U.S. federal income tax purposes, a non-dividend distribution is first treated as a reduction in the shareholder’s tax basis in the stock held, and when the basis in the stock is reduced to zero, a non-dividend distribution is then treated as a capital gain to the shareholder.

Further down the page, Mattel has an example of how a non-dividend distribution works for tax purposes:

Non-dividend distribution Example

An individual who is a citizen of the United States owns one share of Company A, Inc. stock. This share was purchased on December 31, 2013 for $50.00. During 2014, the shareholder receives total dividends of $5.00 on his single share of stock. Assume that Company A, Inc. determines that for U.S. federal income tax purposes, 60% of the 2014 dividend should be treated as a non-dividend distribution and 40% should be treated as a dividend. Therefore for U.S. federal income tax reporting, this shareholder should treat $3.00 of the $5.00 distribution as a non-dividend distribution and $2.00 of the $5.00 distribution as a dividend.

The portion of the distribution which is treated as a dividend for U.S. tax purposes is taxable to the shareholder in 2014. Accordingly, this shareholder should report $2.00 of dividend income on his 2014 U.S. Federal Income Tax Return.

The portion of the distribution which is treated as a non-dividend distribution for U.S. federal income tax purposes will likely first reduce the shareholder’s basis in his stock.  Therefore, in 2014, the $3.00 of non-dividend distribution will likely reduce the shareholders basis in his stock from $50.00 to $47.00.  The reduction in basis should not be taxable in 2014 but may impact the amount of the taxable gain or loss recognized by the shareholder when the single share of Company A stock is sold.

Assume this shareholder sells his single share of Company A stock for $65.00 on June 1, 2015.  The shareholder’s gain from the sale of the single share of Company A stock for 2015 will likely be calculated as follows:

Original basis                                                                $50.00
Less: non-dividend distribution                                       ($ 3.00)
Adjusted basis                                                              $47.00

Sale proceeds                                                               $65.00
Less: Adjusted basis (above)                                         ($47.00)
Capital gain                                                                   $18.00

I hope this information is helpful to people wanting to know more about non-dividend distributions.

Disclaimer: This example is not intended to be tax advice. Please consult your tax advisor for advice specific to your situation.

PFS