Dividends paid to you on shares you own during 2008 are a nontaxable distribution (return of capital) rather than ordinary income. This is the result of the company's tax position that is determined after the close of the year.

 

Restricted shares are treated as still owned by the employer for tax purposes (unless an 83(b) election was made). As such, these dividends will be included in your compensation income on Form W-2. If an 83(b) election was made and the value of the shares was included in income, dividends occurring in 2008 would be treated as a nontaxable return of capital.

 

Some brokers/agents mailed 1099-DIV forms reflecting the 2008 dividends as ordinary income rather than a nontaxable distribution. Corrected 1099-DIV forms were subsequently mailed to properly classify the dividends.

 

The following is an explanation of certain aspects of the U.S. federal income taxation of the 2008 Peabody Energy Corporation quarterly dividends. It does not discuss all aspects of individual stockholder circumstances and does not constitute tax advice. Stockholders should consult their tax advisors regarding their individual circumstances.

 

• All 2008 Peabody Energy dividends paid in cash were considered "return of capital" distributions for tax purposes. These dividend amounts have been reported by Peabody Energy on 2008 Form 1099-DIV tax statements in Box 3 as "nontaxable distributions".
• The "nontaxable distribution" language on Box 3 of the 2008 Form 1099-DIV should be read with care in conjunction with the Instruction to Recipients explanation to Box 3 contained in the notes to Form 1099-DIV. These distributions are more commonly referred to as "return of capital" distributions for U.S. federal income tax purposes.
• If a stockholder has a cost or other tax basis in his or her shares equal to at least the amount of the return of capital distribution, the distribution does not trigger any tax, but instead merely reduces the stockholder's cost or other tax basis in his or her shares. If the amount of the "nontaxable distribution" is in excess of the stockholder's cost or other tax basis, such excess is taxable as capital gain.
• Nuances in U.S. federal income tax laws require this tax treatment which is based on a complex calculation that cannot be computed until after the end of the year. Therefore the tax treatment of the 2008 quarterly dividends was not determined until the close of the year. Similarly, we will not be able to determine the treatment of any 2009 dividends until after 2009's year-end.