Deferral of Cumulative Preferred Dividends: Tax Consequences

ADDED JUNE 26, 2009: As a general rule, equity preferred stocks (other than those issued by REITS) pay qualified dividends. A list of those securities can be found at quantumonline, a free site though registration is required.  Trust Preferred stocks are, generally speaking, classified as debt and their distributions are consequently taxed as interest.  An investor can check this information out at QuantumOnline Credit Ratings - QuantumOnline.com

Most of the following post deals with a subject that I am still trying to learn more about, the tax consequences of a deferred cumulative preferred dividend, and I expect to know more before April 15th of 2010 since I have one in deferral now. 

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I noticed some traffic to my blog on Regular and Trust Preferred issues, particularly on the issue of tax consequences relating to the deferral of a cumulative trust preferred interest payment. Regular Preferred and Trust Preferred  

When a non-cumulative preferred stock dividend is eliminated, it is just gone forever.  So cumulative is always better than non-cumulative. The deferred cumulative dividend continues to accumulate, so that may involve tax consequences.  Since I now have one stock with a cumulative dividend in deferral, BEEPRA, I will discover when I receive my 1099 for 2009 how this will be treated for tax purposes.  I wrote a post recently after I discovered that my broker had reduced my cost basis in that security by the amount of the first cumulative dividend.  If that is the correct treatment, and I have no reason now to know one way or the other, then my cost basis could not be reduced below zero so then there would have to be another method to account for the deferral. Several prospectuses contain provisions stating that deferred cumulative interest payments may have  tax consequences but I am now uncertain about the precise accounting for it under all circumstances. QuantumOnline: For Compilation of Data Relating To Preferred Stocks By joining that site, and checking the links to the Trust Preferred prospectuses, you will find similar language to the citation made in the post from a Citigroup Trust Preferred prospectus.  You will see similar language in every prospectus that I have read where the interest payment is cumulative.  I am not a tax expert, barely proficient in these kind of issues. Specter Now a Democrat/Successor Liability for a TP/More Stories from RB: It is not About Where You Come From But Where Do You Want or Need to Go

Just as another example of language is in the prospectus of BAC Capital Trust VIII at p. S-10  BAC Capital Trust VIII Prospectus Supplement

Added: this is also material from the above linked prospectus:

"You also will not receive payment of the accrued and unpaid interest following the deferral period if you sell the capital securities before the record date for the deferred distributions, even if you held the capital securities on the date that the payments would have been paid but for the deferral payments.....

If you sell your capital securities during a deferral period, you may not receive the same return on your investment as someone who continues to hold the capital securities. In addition, because of our right to defer interest payments, the market price of the capital securities may be lower or more volatile than the market prices of other securities that are not subject to interest deferrals."