3

Form 1099-MISC, line 8, received from normal stockbrokers, can report you as having income in the form of "payment in lieu of dividend". Internet research indicates that this is "treated as ordinary income" instead of dividends.

  • Where (which form and line) should this be reported when filing taxes?
  • Where (on the IRS website) is this documented? A search for "payment in lieu of dividend" site:irs.gov returns essentially no results.

2 Answers 2

3

From the instructions on the back of Copy B of official 1099-MISC:

Box 8. Shows substitute payments in lieu of dividends or tax-exempt interest received by your broker on your behalf as a result of a loan of your securities. Report on the “Other income” line of Schedule 1 (Form 1040).

If your broker uses 'substitute' form(s) 1099, as all mine do, they are supposed to provide the same instructions somewhere, not necessarily on the back.

And this section of pub 550 entitled Reporting Substitute Payments agrees (#fragment will break when the 2021 revision comes out, so search for the text).

5
  • Seems like the same pub 550 provides contradicting instructions, but it doesn't really matter either way. Tax treatment would be the same no matter whether you report them on Schedule B or Schedule 1.
    – littleadv
    Commented Feb 27, 2022 at 6:43
  • 1
    @littleadv: I don't think it's contradicting. Your link says PIL are not qualified dividends, but that's not a statement they are unqualified dividends. And if they were dividends, they would be reportable on 1099-DIV, but the instructions for 1099-DIV (the separate document of instructions to the payer, not the ones on the back of the form to the payee) say not to use it for PIL and instead to use 1099-MISC box 8 (as was done). And unsurprisingly the (payer) instructions for 1099-MISC (now also 1099-NEC) agree with that form. ... Commented Mar 2, 2022 at 7:55
  • ... I agree it makes no difference to the resulting tax, so even if putting it on B is technically wrong (as I believe), it's almost inconceivable they'll bother pursuing you over it. (Cue Princess Bride.) Commented Mar 2, 2022 at 7:56
  • Well... It literally says "Dividends that are not qualified...", so yes, it kindof does say that they are unqualified dividends. They are in fact occasionally reported on 1099-DIV, which is why there's the qualifier about "know or have reason to know". My point is that it doesn't really matter and the "Substance over form" doctrine agrees. It's not just inconceivable, I'd say it would be frivolous since the taxpayer complied with the tax obligations.
    – littleadv
    Commented Mar 2, 2022 at 8:07
  • You're right that my form had those instructions. I missed them under the list of itemized transactions. Commented Mar 3, 2022 at 5:44
0

Either Schedule 1 line 8z, or Schedule B Part II.

Ordinary dividends are taxed at ordinary income rate. You cannot treat the payments as qualified dividends even if the actual dividends would qualify had you received them.

See Pub 550:

Dividends that are not qualified dividends:

...

Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends.

Since these payments are explicitly reported separately - you do in fact know, or have reason to know, that these are not qualified dividends.


The other answer quotes a seemingly contradicting instruction from the same Pub 550. That wouldn't be the first time the IRS provided contradicting instructions.

It's perfectly fine to report it on Schedule 1 as misc. income just as well, the tax effect would be exactly the same.

Important to note that the IRS publications are not a legal authority, and as long as the income is reported and the tax is paid as it should be, reporting income on line X instead of line Y on an IRS form is of no consequences.

7
  • Looks like a good answer, but can you point me to official documentation? The fact that I can't find any IRS guidelines on this is troubling. For example, on freefilefillableforms.com, going to sched b, clicking "instructions", and ctrl+f for "in lieu" yields no results. Commented Feb 25, 2022 at 6:34
  • @blueorchid3 this is explained in pub 550, added a link and a quote to the answer
    – littleadv
    Commented Feb 25, 2022 at 7:20
  • 1
    Disagree; see my references. Commented Feb 27, 2022 at 6:40
  • Pub 550 says "Instead, report the substitute payments shown on Form 1099-MISC as "Other income" on Schedule 1 (Form 1040), line 8."
    – base64
    Commented Feb 27, 2022 at 8:14
  • @base64 as I said, pub 550 provides contradicting instructions, but it doesn't matter. Either Schedule B or Schedule 1 would lead to the exact same effect. There's absolutely nothing wrong doing it either way (and no, Pub 550 is not a legal authority, so if you want to claim that I'm wrong feel free to cite from the IRC).
    – littleadv
    Commented Feb 27, 2022 at 8:40

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .