We received, or were told to expect, a form 2439 from one of our REIT securities. What is that?

You should have been supplied with a Form 2439. To enter the gross amount of the 'deemed dividend' as a capital gain dividend, go to Distributions. Enter the date as supplied by the REIT. If no date was supplied, enter 12/30 of the year in question. For the amount, enter the amount appearing in the 1a box on Form 2439. Ignore the ex-dividend date. Select the appropriate stock. Enter 'Long Term Capital Gain Dividend' for the type. Select Suspense for the cash account. Enter 'Deemed dividend per Form 2439' in the remarks.

The software does not have an appropriate category for taxes paid on behalf of the club. Enter this as an expense. Use the same date as you used for the 'deemed dividend'. Again, select Suspense for the account. The amount will be the amount appearing in Box 2 of form 2439. Select 'Equal Allocation' and 'Non-investment'. For remarks, enter 'tax paid on behalf of the club on deemed dividend'.

A note about what we have just done here. We have allocated the tax paid equally among the members. It does not matter if all partners are not equal. Each member's value will go down by an equal amount. Each member will eventually recoup this amount by getting credit for taxes paid on his or her individual income tax return. If you have no other non-investment expenses, you can easily determine the amount of the credit that each member should get. If you have other non-investment expenses, you'll just have to divide the amount in Box 2 by the number of members as of the deemed date, and award or deduct any extra pennies appropriately.

Now you must increase the basis of the REIT for the net amount of the 'deemed distribution'. Subtract the amount in Box 2 from the amount in Box 1a. This is the net amount to be entered. To enter it, again go to Distributions. The date will be the same as entered in the two previous entries. Select Suspense for the cash account. Enter the net amount with a minus sign in front of it. Ignore the ex-dividend date, and select Return of Capital for the type. In the remarks, enter 'add the net amount of deemed distribution to basis'.

That will take care of the accounting end. There is still the problem of getting the credit for the taxes paid by the REIT to the club members. This will be done by manually changing the K-1s prepared by the tax printer. If the amount of the taxes to be reclaimed by each member is insignificant, you might want to skip the rest of these instructions. Again, the amount per member will be the number in box 2 of Form 2439, divided by the number of members.

When you run the tax printer, you will have to enter each member's share of the tax credit in Box 15 on that member's K-1. Mark this credit with an "H". Then you will have to deduct this amount from the amount appearing in box 18. If you had no other non-investment expenses or tax-exempt income, this amount will be zero, and you can just cross out the amount appearing there. On the Schedule K, you will have to make the same adjustments you did for the Schedules K-1, but in total.

That should complete the exercise.