club_cafe: Re: Qualified Dividends

iras1 on

In a message dated 2/16/2005 12:53:58 A.M. Eastern Standard Time, jonsjunk@bivio.com writes:

Thanks Ira, upon further review Bivio calculated it
correctly. We only held the stock for 21 calendar days,
therefore, it is not eligible for the qualified dividend
status (at least I understand the rules correctly and it
must be held 60 days). Our broker reported it as a qualified
dividend on our 1099 and I assumed (incorrectly) it was
correct.

I do have another question though, we shorted a stock and
had to pay the dividend that was paid while we were short.
In Bivio, the dividend is recorded as a return of capital.
I can't find any accounting of that on the 1065 or Schedule
D.

Any thoughts on this situation?

Bivio may, or may not, be treating this correctly. Here are the rules (source: IRS Pub. 550, Investment Income and Expense, www.irs.gov/pub/irs-pdf/p550.pdf):

Payments in lieu of dividends. If you borrow
stock to make a short sale, you may have to
remit to the lender payments in lieu of the divi-
dends distributed while you maintain your short
position. You can deduct these payments only if
you hold the short sale open at least 46 days
(more than 1 year in the case of an extraordinary
dividend as defined below) and you itemize your
deductions.
You deduct these payments as investment
interest on Schedule A (Form 1040). See Inter-
est Expenses in chapter 3 for more information.
If you close the short sale by the 45th day
after the date of the short sale (1 year or less in
the case of an extraordinary dividend), you can-
not deduct the payment in lieu of the dividend
that you make to the lender. Instead, you must
increase the basis of the stock used to close the
short sale by that amount.

(There is more information in the Pub.) So, depending on how long you held the short position open, it could be return of capital or it could be investment interest.

Ira Smilovitz

Rob Nagler on

IraS1@aol.com writes:
> You deduct these payments as investment
> interest on Schedule A (Form 1040). See Inter-
> est Expenses in chapter 3 for more information.
> If you close the short sale by the 45th day
> after the date of the short sale (1 year or less in
> the case of an extraordinary dividend), you can-
> not deduct the payment in lieu of the dividend
> that you make to the lender. Instead, you must
> increase the basis of the stock used to close the
> short sale by that amount.
>
> (There is more information in the Pub.) So, depending on how long you held
> the short position open, it could be return of capital or it could be
> investment interest.

In the interest of clarity, bivio always records it as a return of
capital, which is legitimate. Most short positions are not held
longer than 46 days. Moreover, if you divide a short position's
dividend by N members of the club, it is usually a small deduction.

Rob

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