Rev. Rul. 60-177

Advice has been requested whether the lender, as well as the purchaser, of stock is entitled to a dividends received credit under section 34 of the Internal Revenue Code of 1954 and to the partial exclusion under section 116 of the Code with respect to an amount equal to a cash dividend paid to him by a `short-seller' on stock borrowed to cover a short sale.

In a short sale, which is usually handled by a broker, the `short-seller' is required to pay to the lender an amount equal to the cash dividend on the stock borrowed to cover the short sale while the stock is on loan. Such an amount, commonly known as a `short dividend,' is credited to the lender's account by his broker. The `short-seller' is entitled to a deduction, for Federal income tax purposes, for the amount which he paid to the lender. See I.T. 3989, C.B. 1950-1, 34.

Section 34 of the Code, relating to dividends received by individuals, states, in part, as follows:

(a) GENERAL RULE.-* * * there shall be allowed to an individual, as a credit against the tax imposed by this subtitle for the taxable year, an amount equal to 4 percent of the dividends which are received after July 31, 1954, from domestic corporations and are included in gross income.

Section 116 of the Code, pertaining to the partial exclusion of dividends received by individuals, provides, in part, as follows:

(a) EXCLUSION FROM GROSS INCOME.-* * * gross income does not include amounts received by an individual as dividends from domestic corporations, to the extent that the dividends do not exceed $50. * * *

Section 1.34-3(a) of the Income Tax Regulations states, in part, that the credit under section 34 of the Code and the exclusion under section 116 of the Code apply only to distributions of property defined as dividends by section 316 of the Code. The term `dividend' means any distribution of property made by a corporation to its shareholders out of its earnings and profits accumulated after February 28, 1913, or out of its earnings and profits of the taxable year. Section 316(a) of the Code.

Since the phrase `to its shareholders' means ownership of stock under section 316 of the Code, the question arises as to who is the real owner in a `short-sale' transaction. Relative thereto, S.M. 4281, C.B. IV-2, 187, at page 188 (1925), holds, in part, that in a `short-sale' transaction the purchaser, rather than the lender, is the real owner of the stock, since in the interim title to the stock has passed to the purchaser.

In view of the foregoing, it is held that the payment by the `Short-Seller' of the stock, which is credited to the lender's account on the books of the broker, is not a dividend within the purview of section 316(a) of the Code, but rather is a sum of money measured by the amount of the dividend with respect to the stock borrowed. See S.M. 4281, supra . Therefore, sections 34 and 116 of the Code do not apply to the payment credited to the lender but are applicable only to the dividend received by the purchaser, the real owner of the stock.