IRS Challenges Qualified Dividend Treatment

SIH Partners, a Delaware partnership, filed a petition in Tax Court challenging the IRS's reclassification of $171 million of reported qualified dividend income (QDI) from Swiss stocks as ordinary dividend income for its 2012 tax year. The petition also challenges the IRS's disallowance of $26 million in foreign tax credits that SIH Partners claimed for Swiss withholding taxes on the dividends.

In general, to qualify as QDI under section 1(h)(11)(B)(iii), a dividend must be paid on stock that the taxpayer holds for at least 61 days during a 121-day period beginning 60 days before the ex-dividend date. To claim the foreign tax credit under section 901(k)(1), the taxpayer must hold the stock for at least 16 days during the 31-day period beginning 15 days before the ex-dividend date. The IRS asserts SIH Partners did not meet either holding period requirement because it also had short exposure to the stock through a portfolio swap.