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mike57dk

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  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Good afternoon all ...

    I think the reality is that ETY, with a portfolio turnover of 30% in fiscal 2012, was simply pruning out the weaker holdings in the portfolio of about $1.6 Billion ...to create a net proceeds of approx $480,000,000. ( 30% of $1.6 billion )
    The fund has a managed distribution policy that requires an annual dividend distribution rquirement of around $150,000,000 ( ish ) ....and they get approx $15-17 million net after expenses to pay out as dividends ....leaving them with a " nut " of about $135,000,000 necessary to pay the annual dividend distribution.

    ETY stated in its audited annual report that its Unrealized Capital Gains in the portfolio had increased to about $250,000,000 and they still held about $450,000,000 in capital loss carryforwards on the books trhru 2018.

    So ...in a nutshell ...ETY greatly increased its unrealized capital gains in 2012 ....sold off thru portfolio turnover about $480 million in net proceeds ...and made the $1.00 + 2012 dividend distribution.

    Deductive reasoning indictates that this would lead to a Return of Capital from the principal invested ...since they didnt use any of the capital gains that could be offset by the huge amount of carryforward losses on the funds books....

    The $250 million in unrealized capital gains makes the books look very positive and a vast improvement over past years ....the NAV is slowly but steadily increasing ...and we still get a bit over a dollar a share discount to NAV ....

    It makes more sense in view of their recent campaign to improve the attractiveness of the fund .... share buyback ....switch to monthly dividends ....that EV fund management wants to show solid fundamentals and good performance of the underlying stocks held in the portfolio ....

    I am a bit concerned by EV's lack of transparency about the on-going share re-purchase plan and their seeming stubbornness about making use of the capital loss carryforwards on their books ...guess they believe they have plenty of time to make use of them ....2018 at least ...

    The net impact being that we will see the cost basis of our shares gradually reduced each month ....the good news for long term holders of ETY being that the original cost basis was $20 per share ....so we have a long way to go ....lol ...before this reduction would practically start to hurt us ....most of us having capital losses should we sell the fund in 2013 ....NOt gains ...

    Oh well ...hope this helps explain what i believe they are doing
    Mar 9 01:15 PM | 1 Like Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Reply to Ken Gold -

    Thanks for your comment and observation...and I agree that some of this stuff does get complicated ...( like my comments )

    I own ETY in several accounts from two brokerage firms ...so far at least ... they BOTH have correctly reported the distributions as non-dividend distributions on line 3 of the 1099-DIV ...and NEITHER firm has adjusted the cost basis due to these non-dividend distributions.

    We started out this long discussion trying to define the ROC characteristics of the ETY dividend distribution ....with many posters to this board claiming that cost basis MUST be reduced at the time of sale ....because of the return of principal aspect ....

    My contention, all along, was that the correct cost bais information was being calculated by the fund and brokerage house and listed on the statements ....

    I plan to simply go along with the reported information on the official 1099 forms ....which carry the HIGHER cost basis number. This way ...my 1040 Schedule D form will EXACTLY match the information provided by the brokerage firms to the IRS.

    The folks making all kinds of manual adjustments to the cost basis ...from the 25 dividends paid since the inception of the fund are in for a " world-of-hurt " from the IRS ....It will be a simple catch for their computer system ...as the numbers submitted dont match.
    This could and should trigger an automatic " review " letter and request for supporting documentation.

    Good luck with that ....

    My arguement in a nutshell - Capital Gain distributions are NEVER considered a return of capital ...capital Loss carryforwards are required to be washed against future gains ....netting ZERO taxation until exhausted or expired ... Further ...Capital gains cannot be used to adjust the cost basis ...they are taxed separately.

    Thanks for your review / observations
    Feb 19 05:39 PM | Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Wow ....while I have not seen my 1099-DIV form for 2012 yet ...the previous years 1099 forms showed the 80-90% of the annual dividend distributions as " non-dividend " distributions on line 3 of the form.

    In the last 2-3 years at least ....ETY has made this large distribution by selling shares of the portfolio and realizing capital gains ....gains which must be washed against previous carryforward capital losses. Their accountant and official auditor ( Deloitt ) confrims this on page 15 of the 2012 annual report ...even breaking down the year by year carryforward amounts ...

    The detailed report also indicates that ETY has approximately $173,626,904 in 2012 in unrealized appreciation ....more than sufficient to pay the $1.00 per share we anticipate in 2013 ...unless the market takes some of that away ...

    My contention is that realized capital gains are NOT and never should be considered return of capital (ROC) ....and therefore CANNOT be used in any calculation of cost basis reduction.

    Capital gains are specifically taxable ( long & short term ) separate from your ordinary income and at stepped up rates based on that income amount ...even adding an extra Obamacare tax of another 3.8% in cases of high earners ....

    Where everyone seems to be " stuck " is the huge amount of carryforward LOSSES the fund holds ....$445,775,309 ( paragraph D, page 15 of annual report ) ....Fund management will " reduce its taxable income arising from future net realized gains on investment transactions ..." using this amount ....

    OK ...lets ASSUME the fund had ZERO carryforward Losses and ZERO Capital Gains ....the managed distribution policy would still require that ETY distribute the $1.00 per share in 2013 ...and they would indeed be forced to cannibalize the principal of the fund to pay that large distribution ....THAT would be ROC or principal invested ....and the cost basis would be reduced by the principal returned ....( whew )

    In the aforementioned example, however, ETY would likely greatly reduce its scheduled dividend amount, while increasing the monthly premiums taken in from the sale of S&P index calls ...expanding the coverage amount from 50% to 70-75% of total portfolio ....creating a lot more portfolio capital gains ( IRS code section 1256 ) taxed at 60% long term / 40% short term ....

    A simple way to look at this :

    Hypothetical - You buy 1,000 shares of APPLE at $100 per share ...( many years ago ) ...you then SELL 100 shares of APPLE at $450 per share ....you have a reportable long term capital gain of $350 per share x 100 = $35,000 ....
    You also have tax loss carryforwards from 2007-2009 ....( Citigroup anyone ? ) ....of ( $100,000 ) ....
    You get to " wash " that $35,000 capital gain AGAINST that $100,000 carryforward loss ....resulting in ZERO capital gain taxation on the $35,000
    Would you then REDUCE your COST BASIS of the remaining 900 shares of APPLE in this example ? by the $35,000 capital gain ? I dont think you would try and do that ....
    So ...where would the $35,000 in hard cash be in this example ? No capital gain taxes to you ....cash in hand ....and NO COST BASIS ADJUSTMENT ....all because capital loss carryforwards MUST be washed against future capital gains ....for 7 years I believe.
    I just dont agree that a cost basis adjustment is required from the distribution of realized capital gains that have been washed against carryforward losses ....we have a window in these type of funds ...a window of very favorable taxation on the actual distributions we recieve ....until the carryforward losses are exhausted or simply expire.
    Therefore ...I wont be reducing the cost basis of my ETY positions ...respectfully ...I don't think you guys should either.


    Feb 19 10:39 AM | Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Reply to Leftbanker -

    To answer bluntly ....In 2011 the taxation on the total amount of dividend distributions from ETY was LESS than 1% ....because well over 92% of the dividend distribution was classified as " non-dividend " distribution ....
    If the $1.08 per share ( estimate ) had been pure investment income or as Ms Nancy Pelosi described it as " unearned income " ...taxation would have been at my marginal rate ....call it 25% ....

    In 2013 ....ETY announced that the Jan 2013 distribution was about 84% non-dividend distribution and 14% investment income ....so the net overall taxation will be a bit higher than 2011 or 2012....

    The tax law was also changed ...and the Obamacare tax on what former Speaker Pelosi called " unearned income " of up to 3.8% depending on your income ...$200,000 + single filer ....I believe it starts ...

    I am guestimating the 2013 tax burden on the estimated $1.00 per share we anticipate being paid at 3% .....or $0.03 for every dollar we get paid ....

    Compare that with your other forms of investment income ....rental income / CD interest payments / Stock dividends ....and most tax planners would suggest a 20%-30% withholding to meet your federal tax obligations ...

    Remember that old Drefyus ad campaign .." It's not what you make ...It's what you keep " That effectively describes the ETY advantage ....most investors will be paying fully 10 x more in taxes per $1.00 paid than holders of ETY.....10 TIMES more in taxes ....

    That is more than enough to get some good attention to the fund ..and a compelling reason to use ETY to supplement your monthly income needs ....

    Hope this helps - Mike
    Feb 15 09:21 AM | Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    reply to Phillipsonh -

    I could not agree with you more ....the taxation aspect is confusing / complicated and ultimately very important in our investment decisions.

    Here is a little story that I cite that will bring the importance of the taxation rate back to ETY and why that is a huge advantage for us ..

    A few years ago, I was dragged to the annual parade of historical homes in Galveston, Texas ....especially the few that survived the huge storm and flood around the turn of the century ....These were the homes of the most wealthy people of the time, shipbuilders, merchants etc / etc ....they built big / beautiful homes that withstood the high winds and water of the great storm ....an estimated 20,000 people were killed then ....Without exception, the homes were engineering marvels ....superbly constructed with the best materials of the day ...but one common feature that stood out among the various mansions was that there were very few closets or small rooms ....few doorways even inside the houses ...The tour guide pointed out that the tax assessor of the time TAXED houses by the raw number of rooms and doorways ... so the very richest of home builders tended to construct their homes with the fewest possible number of rooms or doorways ......thus lowering their annual tax burden significantly.
    ETY is similar in that the tax structure, with $450 million of capital loss carry forwards on the books , will shield us from a typical 25-35% taxation rate on the projected $1.00 per year of dividend distribution we are anticipating ....reducing it to around 3% ...on average ...plus totally avoiding the Obamacare Investment taxation of up to 3.8% starting this year ....

    As mentioned earlier; this is not " chump " change or some obscure accounting anomaly .....It represents a major advantage over other income producing investments ....such as ETFs / dividend harvest funds and even Certificates of deposit ....

    By understanding the current tax code
    , we make potentially better investment decisions than perhaps other investors ....

    As to the portfolio itself of ETY ...it simply holds shares of 121 large cap companies ...75% US 25% foreign ...." on sale " with a double digit discount market price from its quoted NAV ....and paying a 10% annualized dividend ....( monthly distributions ) ....I like the portfolio just fine ....and the index option hedging of 50% of the portfolio is a nice feature too ....The tax aspect, while important, is just icing on the cake ....

    Regards - mike
    Feb 11 01:09 PM | Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Reply to kmbyrne4 -

    Again, thanks for your comment...

    In the old days ....( pre 2007 ) investors used to complain that when they purchased a mutual fund late in the calendar year and held it only a few days or weeks ...that, often they would be taxed heavily on distributions made by the fund at year end ...short and long term gains ....they found it perplexing that they would own the fund a few short days or weeks and suddenly have thousands of dollars in capital gains to account for on their 1040 form ...

    It got to the point where many brokers / advisors would caution investors NOT to buy mutual funds towards year end ...as this simple purchase could have serious tax consequences and affect the overall tax projections so carefully worked out.

    Simply out ...Mutual funds were required by law to pass thru the capital gains to each shareholder on an annual basis ....and the IRS absolutely loved the taxation aspect ....

    Few mutual funds carried embedded losses of serious magnitude ...some even carried huge unrealized capital gains ...( Richie Freeman's Aggressive Growth fund comes to mind )

    To address this uncertain situation; many, if not most mutual funds , adopted a " managed distribution " policy ....fixing the monthly or quarterly distribution amounts at a set level.

    Consequent to the market " horror " of 2008 / 2009 with the S&P off about 58% ...ETY lost over $4.50 per share in one year ...and has been reporting the estimated $450,000,000 carry forward losses on its accounting books since then ....even providing a year by year expiration scheduled for these past losses ....

    Ball parking fiscal 2012 from their annual report ....ETY and its auditor ( Deloitt ) are stating their intention to " wash " these carry forward losses against any capital gains the portfolio creates going forward ....

    I do agree with you that the fund cant distribute LOSSES to the shareholder ...as the IRS strictly limits net losses in excess of $3,000 per year from being deducted ....but...ETY management can and will wash every dollar of future gains against that $450,000,000 realized loss thru 2018 ....I don't think i have seen a mutual fund distribute net losses to any investor ....

    So ..if fund management turns over the portfolio 30% this year ...as they did last ....and generate $480,000,000 of net proceeds with say $100,000,000 of capital gains ....the capital gains taxation on that portion of the distribution is ZERO. We will have used up $100,000,000 of the capital loss carry forward ....

    Ok ....but what the heck happened to the physical $100,000,000 in gains ? The fund, by law, cannot retain it and instead must distribute it thru its normal distribution of monthly dividends ....These are classified as " non-dividend " distributions and are not taxable from the IRS code ....

    The same way that funds used to issue " surprise " capital gains at year end during good years in the market .....NOW ....they can deliver non-dividend distributions ...until the carry forward losses expire or are erased by new capital gains.

    Better put ...if Eaton Vance started a brand new fund today ..did the exact same trades as ETY ....but had no embedded carry forward losses ....the 85% of the dividend would be capital gains ...short and long term ...and taxable at a very high rate ....

    It literally is an " unintended consequence " of mutual fund investing during a turbulent market ....think about this with a fresh perspective :
    The fund is NOT selling shares ...and returning principal amounts to the investor as part of the dividend distribution ....They are realizing capital gains ....washing against previous losses ....and sending out the monthly distribution ...set at $0.084 per share / per month ...

    The fund portfolio is trading actively ...both stock and Call options ...and the fund, by law ( Securities Act of 1940 ), MUST distribute those gains each year or in a managed distribution methodology.

    We have examined the many arguments calling the ROC an automatic cost basis deduction ....but ETY is not distributing capital or principal ....just appreciation and gains from stock sales inside the portfolio.

    Other's have called the ROC ...option premiums that must be deducted from the cost basis ....This was shown to be false in the case of ETY as they don't use PUT contracts ....only S&P 500 Call contracts ...which are subject to IRS 1256 rules of capital gains ....AGAIN ...with no basis adjustment allowed ....

    My contention from the beginning was to illustrate that we are experiencing a " singularity " of accounting and tax law that makes funds with large embedded capital losses very attractive ...we get to pay super low taxes ....because of the non-dividend distributions.

    We have looked at 1099-DIV forms - and agreed that the back page of the 1099 form shows no Return of principal or basis adjustments

    We have speculated at what an impossible task it would be for investors and the IRS to manually account for each of the 25 dividends paid since fund inception ...and how " ball parking " the non-dividend distributions was certain disaster ....and a reason to avoid all mutual fund investing ....forever ....lol

    It comes down to this ....Current Capital Gains must be washed against past Capital Losses to determine taxability ....until year end 2018 anyway ...when the carry forwards expire ....Its accounting and IRS law ...
    Feb 7 09:03 PM | Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    hello kmbyrne4 ...and in reply to your question..

    This is " pure " tax advice and the best answer is to consult a qualified tax professional.

    Some suggestions however....

    1.If you go to a tax guy and ask what do you do with ROC ...my guestimate is that he or she will ( as a reflex ) will state that you must reduce the cost basis ....so DONT DO THAT ....

    2. Use the words " non-dividend distribution " or " Other capital " to describe the $7.50 per share distribution you have been paid since 2007. Thats what the fund is reporting thru your brokerage firm directly to the IRS.

    3. This year ...the IRS is requiring that cost basis information be reported directly to them on the sale of securities ....1099-DIV form ....so in a very literal sense ..the IRS computer system will ALREADY know the cost basis of your sale of ETY in 2013.

    4. Using any different number than the one provided by your brokerage account will signal a review in the IRS model taxpayer program ...just as if you had modified your W-2 amount .... For example - if they think you made $55,567.43 from their employer direct inputs ... and if you file a 1040 form with a different number ...you trigger an automatic review .... " Lucy ..you have some explaining to do ...."

    5.Your example illustrates what an accounting nightmare owning shares of ETY might be ....if every investor / taxpayer had to calculate some kind of ROC deduction of basis with each dividend for the aggregate 25 dividends that have been posted since inception.

    6. Go back ...look at the various 1099-DIV forms that you have been issued since the inception of ETY ...NOT a single one of them contains an entry on the back page summary for " basis adjustment " or " return of principal distributions " ... not in any year ....There is no documented accounting trail to support your manual adjustment of cost basis ...so you would end up just " ballparking " some number on the capital gains Schedule D of the 1040 form ....( not typically a good idea )

    7. ETY uses Index Call options exclusively ...SELLING them each month ...and BUYING them back 2-3 weeks later ....This is a capital Gain or Loss transaction ...Section 1256 contracts ....tax treatment ...60% long term / 40% short term ...gains or losses ...There is no cost basis adjustment allowed / permitted under any circumstance ....NONE / ZIP / NADA ....no exceptions. Simply stated ....exercised call options dont adjust the cost basis ...

    8. My answer to your question - You own ETY at $20 per share ...with a long term holding period in excess of six years ...with no dividend reinvestments ....That specific tax lot should be taxed as $20 cost basis - proceeds price of $10.05 = $9.95 per share on Long Term Capital Loss ....

    Your 2013 1099-DIV will show proceeds as $10.05 per share ...with a cost basis of $20 ....your documentation is complete and exactly accurate.

    9. Now ...allow me to have some fun with that hypothetical $9.95 per share capital loss ...assuming you have 1,000 shares or a $9,950 capital loss ....and that you had a " good year " investing in other securities ...harvesting a hypothetical $25,000 capital gain in 2013 ....you can " wash " that $9,950 capital loss against the $25,000 capital gain ....saving you a hard dollar amount of $2,487 ( 25% bracket ) of federal taxes owed ....

    So here it is in a nutshell ....you actually MADE money holding shares of ETY since late 2006 ....( dividends paid to you in cash plus the proceeds from the sale of the shares ) ....something close to 6% ...total return over six plus years of duration ....AND ...you got another $2,487 in tax savings by washing the capital loss against your other portfolio capital gains ....

    Not exactly like that Dire Straights song ...." Money for Nothing and your chicks for Free ..." .....but in the words of Adam Sandler ..." Not too shabby ...."

    Hope this helps / Good luck - Mike
    Feb 5 10:55 AM | Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Reply to KenGold ....

    Thanks for your kind comment ....I like your strategy of making a list of interesting CEFs ....ETY should be on it....and I agree that we will most certainly have " down-days " in the market which should make the market price of ETY even more favorable ....

    Just keep in mind that ETY management is BUYING back shares in the open market each month in an attempt to reduce the outlandish discount to NAV ....They stopped reporting after Nov 5 , which they were NOT required to do ...but it did show that they had spent about $15,000,000 in the first two months of the repurchase program ...

    My point is that ETY will ALSO be in the market to buy shares ....as much as 9% more of the total out there ....

    I would suggest you look at the discount to NAV ..currently about 11.7% ...and target a 12-12.5% discount to NAV purchase price ...i.e. buy it below $10 per share ...lol ...

    While making your list ...start to look at AWP also ....they have approximately $1.2 billion in capital loss carryforwards ...invest in glitzy real estate ....pay about a 7.7% annualized yield ...and similiar to ETY was beaten down horribly in the past years ....and is trading with a 7.4% discount to NAV ...

    Last year my Total return on AWP was above +50% ..making it the portfolio winner for me ...lol....

    They also did a 10% share tender offer ...back in June ....in the $6.40 per share area ....should illustrate the power of share buy-backs ...

    Its top end real estate such as " fancy hotels " ...as as such it is a totally different asset class than ETY ....( we cant put everything in ETY - LOL)....

    Good luck ....and best regards
    Feb 2 10:33 AM | Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Reply to Spielerman -

    Thanks for your kind comment ....as to your question about 2013 tax rates on dividends and capital gains ....

    Senior citizens with income of $36,250 ( single ) and $72,500 ( jointly ) have a 2013 dividend and capital gains tax rate of ZERO. That was a nice improvement from 2012 and a suprise ...for once the lawmakers realized that Seniors were poised to take a huge tax beating and increase ....with nothing but Social Security and Investment Income ....to pay for it ....( my cynical guess is that they didnt want to face the voters next year ...having dramatically increased taxes on " fixed income " retirees ...but that's just me )

    For everyone else ...with incomes less than $200,000 the tax rate on capital gains and dividends in 2013 is 15% ....same os in 2012.

    The folks making more than $400,000 get socked with 20% plus the new Obamacare tax of up to 3.8% ....

    With the Jan 2013 dividend distribution; we can " guestimate " that ETY, with its managed distribution of $0.084 per share / per month or $1.00 per year ....was broken down into 23.2% Investment income and 76.8% Non-Dividend distributions ....( that's the unaudited breakdown in their news release )

    To your question ...What is taxable ? form the $1.00 per share we hope to get PAID in 2013 ...

    $0.232 x your tax rate of either ZERO or 15% ....depending on your income ....as a " almost Senior " ....I am ballparking 15% or $0.034 per $0.232 of investment income ....

    The remaining $0.768 per share is tax free as it constitutes a non-dividend distribution or Other Capital ....

    So ....if my income in 2013 is below $36,250 ....the entire $1.00 per share is non-taxable ....

    Otherwise ...I will owe $0.034 per $1.00 paid to me in 2013 ...

    Want to go even further ? Compare ETY to the S&P 500 ETF - Symbol SPY ....( very popular invesment )

    SPY is trading at $151 per share with a 2.10% dividend yield

    ETY is trading a $10 per share with a 10% yield ....

    Say you purchased $50,000 of SPY VS $50,000 of ETY ....

    Your 2013 investment in SPY would earn you $1,050 in annual dividends ...TAXED at 15% ...so you actually keep $892.50 ....

    Your 2013 investment in ETY would earn you $5,000 and you would keep around $4,825 ....

    Thats REAL money and a huge difference ....

    Hope this helps explain ...regards

    Feb 2 10:03 AM | 1 Like Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Reply to KenGold -

    I pulled my 1099-Div statements from 2011 and 2010...just to be precise and avoid any mis-information.

    line 1a - total ordinary dividends ( includes 1b ) $5,503.22

    line 1b - Qualified dividends ......................... $1,862.43

    line 3 - Nondividend distributions ...............$4,038.87

    In the detail breakout section for Dividends and Distributions

    ETY - CUSIP # 27828N102 -02/28/11 - $6.43 - Qualified dividend
    02/28/11 -$662.60 - nondividend distribution

    This was repeated for the remaining three quarterly dividends paid in 2011....

    The net result being that ETY created a qualified dividend stream to me in 2011 of $26.78 ....and taxable at 15% back then ...so $4.02 of the $26.78 was required for federal taxes due ....

    ETY also contributed $2,759.65 in completely non -Taxable, non dividend distributions ....
    ETY distributed ZERO short or long term capital gains ....ZERO / ZIP / NADA ...in 2010 or 2011. ( because the capital loss carryforwards washed all capital gains away )

    The Summary also had this listed :

    Return of Principal distributions ......................... $0.00

    Basis Adjustments ......................... ..................$0.00

    Summary / opinion - I paid $4 in federal income taxes on cash received / reinvested of $2,786.43 ...Thats about a 0.0144% rate ...( check my math but $4 on $2786 is way less than 1% )

    Less than the cost of the " meal deal " from Subway ...or a Happy Meal at McDonalds ....got me $2,782 in net tax-free Income.

    To be extra -certain ; I checked the other brokerage account where I have ETY ....at a different firm ....and saw the exact same accounting result and methodology ....

    No ROC / No Basis Adjustments ....This is just Other Capital or non-dividend distributions ....

    As I stated before; this is not some sleazy accounting gimmick ..Its actually the only way to account / pay taxes correctly on the distributions from this security....

    If ETY didn't have such a huge amount of capital loss carryforwards ...I have no doubt that much of this income would have been classified as short and long term capital gains ....and taxable at a very high level ...plus potentially Obamacare investment tax depending on your income ...( 3.8% more potentially )

    My guess is that we will have 3-4 years of this super-favorable tax treatment ...and then face the consequences of high taxation that our lawmakers have bestowed upon us ....

    As more and more people figure this out ...I predict that there will be a migration from high tax funds ....to these high yield / low tax funds ...not just ETY ....but that's the one Option Income fund I own...lol ...so I am hoping the renewed interest will stimulate buying and move the market price even higher ...

    Hope this helps ...I really tried to make it understandable and specific ...we still have market risk and plenty could go wrong in our investment thesis ..but I am looking for + 20-25% from this fund in 2013 ...we almost got that much last year alone ...

    regards -
    Feb 1 06:47 PM | 4 Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Reply to KenGold -
    Thanks for your earlier comment...and I apologise for the , at times, tedious complexity when discussing the Other capital / ROC issue.... Now to the concerns raised :

    1. TD Ameritrade is a solid firm with excellent tax reporting capability ..I have no doubt that if you owned a CMO or mortgage style bond, that the ROC amount would be accurately reported on your monthly statement...illustrating a slow but steadily decreasing cost basis as the underlying mortgages were paid off thru refinancing or expiration. Most brokerage firms have a similiar capability. In this case, Return of Capital really is ROC ...lol ...and a portion of the original amount invested really is returned to you.

    2. Having said that, ETY is a " different breed of cat "...the cost basis adjustment the TD Ameritrade guy is talking about is simply the " dollar cost averaging " of reinvesting your quarterly ( now monthly ) dividends back into the fund ...Example - You buy 1,000 shares at $15 per share ...and then reinvest the quarterly dividend of $252 at the new market price of $8 per share to garner 31 new shares ...lets stipulate that you do this 10 times with each dividend payment ...( easy math for me - thx ) so 31 shares x 10 =310 new shares and you have paid $2,520 to buy these new shares ...You started out with $15,000 invested and 1,000 shares ...you now have 1,310 shares with a cost basis of $17,250....and your per share cost basis is " adjusted " to $13.17 ....down from $15 per share.
    My guess is the declining share price is what the TD Ameritrade guy is talking about doing automatically ....BUT...that has nothing to do with Other Capital or ROC adjustments.

    3. Imagine in the aforementioned example, what your unrealized long term loss would look like on that statement ? a cost basis of $17,250 ...owning 1,310 shares with a market price of $8 ....for a current value of $10,480 ....and an unrealized loss of ( $17,250 -$10,480 = $6,770 ) OUCH ....That is pretty much what has happened with ETY investors ....except that ETY investors have received 25 dividends since inception totalling about $9.48 per share ....and the raw number of shares owned, even when priced at $10 per share ...makes the current market value MORE than the starting value ...about 5-7% more ...

    4. I seriously doubt that your brokerage firm is subtracting the ROC amounts from your cost basis ...and further...I cant imagine a circumstance where you would MANUALLY adjust that 1099 reported cost basis price to the IRS ....their computer system would flag the discrepancy immediately as the numbers simply dont match up....even though you would, in a real sense, be paying MORE taxes than required ....

    5. This stuff gets complicated ( as you said ) ....but try this explanation / example - You buy 1,000 shares of Apple at $300 with a cost basis of $300,000....you separately SELL 100 S&P 500 index call contracts ....taking in $10,000 in option premium ...Apple shares climb to $450 ....( nice move ) but the market also moved up substantially ....so you had to CLOSE the option position by buying it back ...and it cost you $20,000 to do that ...ouch ...

    You decide to pay some bills ...so you sell 200 shares of Apple at $450....creating a short term capital gain of $150 x 200 shares sold = $30,000 ...
    You LOST $10,000 on the Option transaction ....6,000 long term capital loss / 4,000 short term capital loss ....

    For simplicity and clarity ...just subtract that from your $30,000 gain on the Apple proceeds ...leaving you with $20,000 in cash ..in hand ....

    But wait ...you lost $100,000 in 2008 in Citigroup stock ...and have been forced by tax law to carry that forward ....now ...you can " wash " $20,000 in gains against that huge capital loss ....

    So ...no capital gain taxes are due ....no adjustment to cost basis is necessary or even allowed ....and you have $20,000 in cash ...in your hand.

    That $20,000 is considered non-taxable as Other Capital or ROC ...

    This is exactly the tactics and strategy being employed by ETY ...
    Without having a $450,000,000 capital loss carryforward on its accounting books ...the monthly dividend distribution would be taxed heavily ...and that tax obligation would be passed thru to you.

    Far from being some obscure accounting point ....This is central to the thesis to own the fund ....high income / super low taxes .... You can buy an Exchange traded fund that specializes in dividend paying securities ...but they typically have very little capital loss carryforwards ....so you wind up paying taxes at 25-35% rate plus the new Obamacare surcharge in 2013 ....with ETY, you will be paying tax rates of about 3-4% on the $1.00 per year distribution ...

    This is a HUGE factor in favor of owning the fund ...the cost bais adjustment arguement AGAINST owning the fund is flawed and erronous ....
    Let the fund and its auditor do the heavy accounting " lifting " ... and simply provide you with annual 1099 DIV forms ....that way ..you dont have to figure this stuff out ....that what you pay them for ...lol.

    Regards - Mike
    Feb 1 10:11 AM | 1 Like Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Respectively , and as you said,....ETY did start out at $20 and is now trading a bit above $10 per share ...

    My brokerage statement shows a long term unrealized capital loss on the investment of ($8,248) ...making ETY one of the biggest LOSERS in my portfolio ...

    But wait ...I have $3,614 MORE dollars of current value than on DAY ONE of the IPO .....how can that be possible ?

    The accounting rules treat each dividend reinvestment of new shares as if you wrote a new check for the purchase ...

    Over time ....we have collected numerous dividend checks resulting in many / many new shares of ETY ....The new aggregate number of ETY shares, even at $10 per share ...is greater than the initial investment ...by about $3,614.

    So .... I could SELL my shares of ETY and realize a Capital Loss of $8,248 ....wash that loss against any other capital gains I may have had ...reducing my tax bill by about $2,000 ( 25 % tax bracket ) and still have $3,614 more dollars than when I started....call it a $5,600 hard dollar gain ...thru one of the worst recessions in US history.

    Not too shabby ....

    The simple truth is that if you purchased ETY on the IPO ...and reinvested your dividends ....you have MORE money or cash value today than when you started ....not rocket science ...but it " beats-the-sox off " actually losing money ....

    Now your arguement against ETY is that ..." well, yes I made some money ..( + 6-7% net ) ...but I could have done better buying something else ..."

    Ok ...you got me ....( said in good humor and not intended to be offensive )

    Hope this helps explain why so many people pour HATE on the fund ....the monthly statements really do show this investment as a huge LOSER ....despite you having more money than when you started ...

    You just gotta love accounting ....

    Regards - Mike
    Jan 31 03:09 PM | 2 Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Seems like this cost basis adjustment concern is fairly widespread ...( see my earlier comment )....
    my brokerage 1099 reports the 85% of the distribution paid for 2011 as " Other Capital " ...instead of ROC ...perhaps that term is easier to digest / explain that there is NO cost basis adjustment relative to the distributions paid to you by ETY.
    The short answer ...is that while the fund sells its appreciated stock and index calls to create funds to pay out the large monthly distributions in a " managed distribution " policy ....these are treated as Capital Gains ....but before they are taxable ....the gains MUST be " washed " against previous carryforward Capital Losses ....and ETY holds about $450 million of carryforward losses thru 2018.
    The net result is ZERO capital gains tax ....

    Simple example - lets assume the fund earns $3 a share from its long position in APPLE stock ...( its # 1 holding but which has dropped over $100 per share in value over the last few weeks )

    That $3 per share capital gain would be normally passed thru to you the shareholder ....as a taxable event ....and you would owe 20-25% of that distribution to the IRS depending on your income tax bracket ...
    But wait ...the fund holds a capital loss carryforward of about $8.00 per share ....so the ENTIRE $3 per share gain would be " washed " against this $8.00 amount ....leaving ZERO as the taxable amount and $5 per share as a remaining carryforward loss ...

    Fund management would distribute the $3.00 per share in cash earned ...over the managed distribution of monthly dividends ....

    The $3.00 earned in this hypothetic is OTHER CAPITAL ....and is entirely non-taxable ....( not even Obamacare tax ) ....The money had to go somewhere....the fund, by law, cannot hold much of it away from the owners / shareholders ....as they essentially ' pass-thru ' the taxable event to us shareholders ....( Securities act 1940 )

    It does not, in my opinion, reduce the cost basis ....It cannot.

    ETY management will report purchase price aggregate information thru your brokerage account ....( including reinvestments of dividends ) ...thats the number on your 1099 ....and the one that I would use ....

    Good luck ...
    Jan 31 02:45 PM | Likes Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    KB - saw your question ....let me re-state the reasoning there can be no " adjustment to cost basis " for tax reporting purposes for specifically ETY. ( other funds may be diferent )
    1. The fund holds two distinct types of securities ....common stock and S&P 500 index options ...exclusively CALL options.
    2. IRS tax law regarding index options was settled in the early 1990's by the US Supreme Court ..They are specificly treated as Section 1256 contracts where the holding period or duration of the contract does NOT determine long or short term gains ...rather a simple 60% long term / 40% short term formula is applied to all GAINS from the proceeds of the index option transaction. So ...a one day or one hour duration still gets you 60 / 40 tax treatment.
    3. Here is an example: if you re in the 25% bracket, the effective rate on short-term gains from trading in these options is only 19% [(60% x 15%) + (40% x 25%) = 19%]. That s a 24% reduction in your tax bill.
    4. ETY is Selling and Buying back over 80,000 S&P 500 index call contracts each year ....the KEY terminolgy to keep in mind is that any GAINS or LOSSES are treated as CAPITAL GAINS / LOSSES... and MUST ( by tax law ) be accounted or " washed " against previous carryforward losses in the fund ..ETY has about $450,000,000 in REALIZED losses from 2008 ...
    5. Every dollar of gain from the investment portfolio must be " washed " against that huge carryforward loss number thru 2018...before we get the first penny of capital gains taxation.
    6. Now ....to your question of ROC ....lets postulate that ETY has paid out about $9.40 of dividend distribution since inception ...with about 90% of that being called Other Capital or ROC depending on your brokerage firm 1099 form. So call it $8.40 per share of ROC to reduce your cost basis ? That would impute your true cost basis to around $1.60 per share ....with ETY trading around $10 per share. Hmmmmmmm....sort of a " Roll your own " cost basis depending on your purchase date ....what a potential disaster of accounting / reporting that would be .....especially with the IRS requiring that cost basis information be included on every 1099 report of proceeds this year ....( an impossible task given this premise of reducing the basis by ROC and the literally tens of thousands of share holders in the many different option income funds )
    7. Secondly ...realize that the 80,000 plus Index call contracts the fund is selling and closing out ( usually within 2-3 weeks ) are NOT related directly to the portfolio ....the index options are settled in cash ...you cant simply deliver shares of stock to pay for them or have your Apple shares called away in an exercise so to speak ...The option contracts are separate securities ..from the stocks held in the portfolio ...and MUST be taxed as capital gains / losses as mentioned above. These are literally " naked " or uncovered option positions ....and most investors would not qualify or be considered suitable to trade " naked " S&P 500 call options ..( ask Doug how many times he has gone " naked " with index options for himself or his clients ? ...doubt he does it much..if at all ) The maximum loss potential alone would give pause to any investment advisor or client ....
    8. ETY employs Deloitte & Touche as their auditors and they certify the annual reports and the accounting methods used ....Under the Securities Act of 1940 this is a mutual fund ...where gains / losses and income are " passed -thru " to the owner or shareholder minus of course the funds expenses ....Deloitte & Touche DO NOT report any potential cost basis reduction in ANY of their quarterly / semi annual or annual reports ....since inception.
    9. ETY was incepted with an Options Advisor firm essentially doing "covered calls " against the portfolio positions ....they later FIRED that firm ...and adopted the index option CALL tactic ...it was cheaper and much more tax efficient. But ...lets assume that the fund had continued to use a " covered call " strategy instead of the " naked " index calls ....when exercised ...the premium recieved is simply ADDED to the Strike price of the exercised call option ..no adjustment of cost basis is allowed / permitted ...even then.
    10. Finally ..ETY was created to provide high income with tax efficiency ...with potential price appreciation in the portfolio as a secondary target ....Nobody in their right mind would want to own a fund where there were cost basis adjustments 12 times per year ( monthly dividends ) or where the IRS could swoop in and smash you with a huge capital gain tax bill at their lesiure ....by that same thinking ...no one would own Commodity or index option contracts...which is why the Section 1256 rules were instituted in the first place ...orderly / simple / efficient accounting rules to regulate the fast growing commodity / broad based index option market.
    11. I think that anytime a document or author mentions the character and risk features of standardized options ....the default language is written to cover every base ..CALLS / PUTS / Index ...and subsequently there is mention of potential cost basis adjustment ...( exercised PUT contracts have that feature for example but CALL options absolutely do NOT ) ETY exclusively uses index CALL options ....so cost basis adjustment is not a consideration.
    12. This is not simply some accounting " gimmick " or slick way to avoid " fair share " taxation ....the IRS loves to tax us at the short term rate ....and sometime in the future ...( 2019 ? ) ...ETY may start producing tons of capital gains taxation ...and we will be facing a 19% blended tax rate on the 85% of the annual dividends we receive from the fund plus the dividend tax rate on the other 15% ...( 25% tax bracket assumption ) ....that will be a so-called " Chappaquiddick " moment for all of us ...." we will cross that bridge when we come to it" ...lol
    In the interim ....enjoy the anomoly of the large tax advantaged dividend distribution ( 10% annualized ) , the discount to NAV, and the potential of real growth in the portfolio ...and the approximate 4% Federal taxation rate ...
    When its over... we wont see this type of tax advantaged income for quite some time ....
    Hope this helps explain the ROC issue ...thx
    Jan 31 12:12 PM | 1 Like Like |Link to Comment
  • Equity CEFs: The Insanity Of CEF Investors [View article]
    Doug - Interesting article on ETY / AOD comparison. A few points to consider and emphasize .....
    1. ETY purchased about 1.5 million of its own shares during Sept & Oct 2012 and was booking for accounting purposes some nice short term unrealized gains ....They stopped reporting their monthly purchases after the Nov 5 announcement ...but by my estimate...they have the authority to purchase another 9% of the outstanding shares of the public float in the market which should further reduce that large discount to NAV, and improving the market price ...Interesting that they stopped doing public disclosure monthly of their re-purchase activity...we will have to wait for the semi-annual report to update that buying activity.
    2.We recently passed the Jan ex-dividend date for the first monthly distribution ....and the fund's market price held steady ...even moved up along with the market a bit. While early, this may be vindication of fund management's decision to go to a monthly distribution vs quarterly. In the past, we were whip-sawed by price movement / volume around the ex-dividend dates ...as I believed the dividend " chicken-hawks " would swoop in ...buy the shares and then dump them within a few days / weeks ....Looks like this day-trading has slowed down or even stopped ...and thats good news for the longer term holders.
    3. Another unintended consequence of the disastrous markets of 2007-2008 is the reality that many mutual funds, but particularly CEFs have huge / outsized capital loss carryforwards to wash against future capital gains for 4-5 years going forward ....ETY has approximately $450,000,000 for example ....on a fund with $1.6 billion in assets ....( AWP has $1.2 Billion with only $666 million in assets ) This is a huge advantage for new investors who can buy the fund and effectively pay ZERO capital gains taxes for 60 or more months ....the only taxes would be on the dividend stream earned by the portfolio itself ...about 15% of the 2012 distribution ..call that about $1.04 per share so ( roughly ) $0.88 is considered Other Capital and $0.16 is taxable ...say at 25% Federal rate = you owe the IRS about $0.04 for every $1.04 in distribution received ...an effective rate of 3.8% ....thats real tax efficiency.
    4. Comparing ETY with municipal bonds in a tax advantaged account ....ok ....10 yr maturity / AAA muni bonds are yielding 2% and that would be tax free ...so after 10 yrs investment duration...you would have about $12,201 in total return value with the AAA muni ..( unless, of course they were Stockton CA or any Chicago / Detroit bonds ...where zero is a more likely investment result ) ....ETY ...with market risk and assuming the same $10,000 investment and an exactly FLAT market price over the entire 10 yr duration...but with monthly dividends of $0.083 ...would have a value of $19,960. And ...what if the market return was greater then zero % for the next 10 years ? say a paltry + 5% annualized ? ( we did after all just book a +16% 2012 ) well ...your value would be $29,358 ...I understand the premise that tax free investments inside a tax sheltered account don't make a lot of sense ...ETY is tax advantaged, not tax free...and its defensive / cautious tactic of using S&P index calls to partially protect the portfolio make it a good choice for IRA accounts ( in my opinion ) just as the Feds ALLOW covered call writing inside IRA accounts as a " conservative income strategy "
    5. Lastly, There will be NO ADJUSTMENT of COST BASIS with this mutual fund because of ROC or OTHER CAPITAL received ..Its an accounting nightmare and an urban myth that has impeded the performance of the market price. The tax law on index options was settled in the US Supreme Court back in the early 1990s ....think about it ....the thousands of ETY shareholders artifically reducing their cost basis by a made up number ...The IRS trying to determine the exact cost basis ...ETY reporting by 1099 a totally different number ??? It would be a disaster ...and an open invitation to an IRS audit ...every year. ETY is closing out 95-97% of their Index Call options each month ...TAX LAW calls this a capital gain or loss transaction ....no adjustment of cost basis is allowed or permitted ....( that happens with PUT contracts ) ...ETY is therefore " washing " any generated capital gains from the sale of stock or index option transactions AGAINST carryforward capital losses with the net result being ZERO capital gains ...and no capital gains taxation for the next 60 months ...at least.
    This inherent debate over ROC / OTHER CAPITAL continues to "dog" the fund...first it was that the fund was cannibalizing itself with excessive distributions that would lead the NAV to zero in a few years ....( AOD anyone ? ) ...then this mantra of "reducing the cost basis " amount of non-taxable income paid ....started to appear on discussion boards and in articles ....NEITHER is true ....but this ROC debate is particularly deceptive ....and inaccurate. The IRS absolutely loves the tax structure of these Option Income funds ...they get to tax the gains at a very high short term capital gains rate ....but...because of the capital loss carryforwards ...there are NO GAINS to tax ....

    Thanks for the interesting article ...Regards - Mike
    Jan 29 12:19 PM | 2 Likes Like |Link to Comment
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