Silly Season

	Roger Conrad Utility Forecaster.com
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Is it ordinary income or a qualified dividend?

According to the Internal Revenue Service's (IRS) equity test, under Internal Revenue Notice 2003-79 issued December 15, 2003, all dividends on US and foreign equities in 2004 are to be considered qualified income, taxable at a maximum rate of 15 percent.

Nonetheless, confusion reigns supreme on Wall Street. At least one major brokerage has declared all Canadian trusts' distributions as 100 percent ordinary income. Some have sent out 1099s showing similar trusts as both qualified and ordinary. And others have divided dividends for the same trust.

The confusion doesn't stop there. Dividend reinvestment plan holders of blue chip utilities like Southern Company are receiving 1099s listing the same dividend as ordinary and qualified. And that's further confusing mutual funds that figure their own tallies.

Case in point: closed-end fund Flaherty Crumrine Preferred Income Fund, which holds a combination of qualified and capital preferreds, shows its dividend as 78 percent qualified and 100 percent as ordinary income.

Ironically, the one saving grace comes from the IRS itself, which states in 2003-79 that intermediaries may report distributions as ordinary dividends on Form 1099-DIV. The US taxpayer may be entitled to (and, therefore, should) report the distributions as qualified dividends. In other words, the 1099 isn't the end all.

In addition, big accounting firm KPMG issued a Canada TaxNewsFlash on February 4 stating that trust dividends should typically be considered qualified.

The upshot: It's up to you to set things straight. And consulting with a tax professional is essential.

You shouldn't pay more than 15 percent on distributions from these Portfolio recommendations, regardless of what your 1099 says: BP Plc, ChevronTexaco, Consumers Energy Preferred B, Dominion Resources, NiSource, Regions Financial, Southern Company, Verizon Communications and WP Carey.

Growth Portfolio picks Advantage Energy and Enerplus have specifically stated that their 2004 distributions are to be considered qualified. Ditto 2003 payouts at Bonterra, Great Lakes and Vermilion.

In the ordinary income camp: bonds, including all Portfolio open-end bond funds and INGDirect. Northrop Grumman convertible is capital preferred, with the distribution taxed as ordinary income.

More complicated are the real estate investment trusts Boston Properties, New Plan Excel and Prologis Trust—their dividends are part tax-deferred return of capital, capital gains (taxed at a maximum 15 percent) and ordinary income.

Boston reports 93.4 cents return of capital, about $1.62 ordinary income and the rest as capital gains. New Plan's payout is $1.19 ordinary income and the rest return of capital.

Prologis reports 64.4 percent ordinary income, 24 percent return of capital and the rest capital gains. Limited partnership TEPPCO will also report a huge chunk of its dividend as return of capital when it sends out K-1s this month.

The good news: All four have a history of accurately navigating the tax laws for investors--1099s should be accurate. As for the Flaherty fund, see what it sends you. For tax purposes, declare 78 percent as qualified and the balance as ordinary income.

Roger Conrad will be available to take your questions until Thursday, February 24. Please use the form below to submit your questions.