IRS Updates Rules On Non-Dividend Payments

by Leroy Baker, Tax-News.com, New York

18 September 2003

The Internal Revenue Service has issued new guidance to securities brokers, updating the information they need to provide concerning non-dividend payments to customers such as interest payments, and dividends from stock borrowed under short-selling arrangements.

The dividend tax cut which was signed into law as part of President Bush's $350 billion stimulus package reduces the minimum tax on dividends to 15%, although there are some exceptions, notably payments in lieu of dividends. For example, interest payments from bonds or REITS (Real Estate Investment Trusts) do not qualify, and neither do dividend payments from borrowed stock.

The IRS, however, is giving taxpayers a degree of flexibility when it comes to deciding on the tax treatment of certain payments. This means that individuals may treat payments detailed on a form 1099-DIV (the form dealing with dividend income) as dividends for tax purposes unless they are certain that a payment is not eligible for the lower rate of tax.

The Revenue is soon expected to amend regulations surrounding the treatment of dividend payments on borrowed stock. The agency has also issued a notice saying that penalties will be waived if a broker has completed a form or tried to comply with the law which applies to customer payments in the 2003 calendar year 'in good faith'.

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