AES Preferred "C" and 1099-OID
Hi everyone! I've been following this thread for several months. I've learned so much, and have started to pick up some preferred shares as part of my dividend account. I plan to buy and hold till called. One of these has raised an issue that I don't understand and can't find a clear answer to. This is kind of a long entry, but I want to include all pertinent information. Here goes:
08/29/2016: Purchased 200 shares of AES-C at $50.10 plus $7.95 commission = $10027.95 total cost.
10/17/2016: Received first $168.75 interest payment
01/16/2017: Received second $168.75 interest payment ….. so far, so good!
Now I have received my 2016 tax forms 1099 from Fido. Included was a 1099-OID ("Original Issue Discount") from AES showing $225.00 of income in 2016 as OID. This was the only income showing from AES (no entry in the dividend or interest sections). When I imported this into Turbotax it shows up as regular income.
From Quantum Online's entry on AES-C:
"Because the issuer has the right to extend the interest payment period for an Extension Period of up to 20 consecutive quarterly interest periods on various occasions, the junior subordinated debt trust securities will be treated as issued with "original issue discount" for United States federal income tax purposes. As a result, holders of preferred securities will be required to include their pro rata share of original issue discount in gross income as it accrues for United States federal income tax purposes in advance of the receipt of cash. Generally, all of a securityholder's taxable interest income with respect to the junior subordinated debt trust securities will be accounted for as "original issue discount" and actual distributions of stated interest will not be separately reported as taxable income. See "ACCRUAL OF ORIGINAL ISSUE DISCOUNT" on page S-39 of the prospectus for further details."
From that page of the Edgar prospectus listing for AES-C:
"The Preferred Securities may trade at a price that does not fully reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A holder who disposes of its Preferred Securities between record dates for payments of distributions thereon will nevertheless be required to include accrued but unpaid interest on the Junior Subordinated Debentures through the date of disposition in income as OID, and to add such amount to its adjusted tax basis in its pro rata share of the underlying Junior Subordinated Debentures deemed disposed of. Accordingly, such a holder will recognize a capital loss to the extent the selling price (which may not fully reflect the value of accrued but unpaid interest) is less than the holder's adjusted tax basis (which will include accrued but unpaid interest). Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes."
I like to think of myself as intelligent, but I don't really understand a) why securities on the secondary market have OID, and b) how the amount of $225.00 was derived, and c) is this a common problem I should watch for in the future when evaluating preferred issues.
Fido hasn't been able to help. Can anyone here explain this in regular English?
BrianB