Jim Maule has a good post on a recent case exploring the question of what constitutes a qualified dividend for the preferential rate provided (temporarily) in section 1(h)(11) treating dividends as net capital gains. See Tax Complexity of the Dividend Kind, MauledAgain (Jan. 6, 2012) (discussing the decision in Rodriguez v. Comr.,, 137 T.C. No. 14 (2011)).
The case touches on a recurring issue in tax law--the fact that there are straightforward provisions such as those governing the characterization of a payment to a shareholder as a dividend in section 301 and then much more complex provisions that may treat a tax item as "equivalent" to a dividend or may "deem" it to be a dividend. The necessity of characterizing income is due to the preferential treatment accorded capital gains--a treatment that is both at the center of considerable complexity and hard to square with basic concepts of equity.
Maule's comment is on target:
The time, resources, effort, and energy invested by the IRS, by the taxpayers, and by the IRS in resolving this issue is but one of many examples of how the existence of special low rates for capital gains and dividends is wasteful. Taxpayers generally, and their advisors, not only try to find ways to bring income within the special low rates but also to structure their business activities in ways that they otherwise would avoid, simply to take advantage of special low rates. Repeal of these rates would not only allow removal of at least one-third of the Internal Revenue Code and a similar substantial part of the regulations, it would free taxpayers, the IRS, and the courts from a huge chunk of planning and litigation that consume far more of the economy than the special low rates contribute to it. Id.