Internal Revenue Service
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 Rev. Rul. 62-42

1962-1 C.B. 133

Sec. 162

Sec. 212

Sec. 1016

Full Text

Rev. Rul. 62-42

I.T. 1764, C.B. II-2, 22 (1923), holds in effect, that the gain or loss on stock purchased to close a short sale is the difference between the proceeds of the short sale and the cost of the shares purchased to close the short, sale, plus the total amount paid by the taxpayer which is attributable to dividends on the stock borrowed to cover such short sale.

S.M. 4281, C.B. IV-2, 187 (1925), states that sums debited to short sellers' accounts, by the brokers carrying them, to cover sums accredited to the accounts of `long' clients whose stock has been `loaned,' are properly deducted by the short seller in computing his proft, if any, resultant upon a covering purchase.

However, I.T. 3989, C.B. 1950-1, 34, as distingished by Revenue Ruling 60-359, C.B. 1960-2, 104, holds, in part, that amounts equal to ordinary cash dividends, paid by an investor with respect to stock borrowed to cover short sales, are allowable deductions under section 23(a)(2) of the Internal Revenue Code of 1939, now section 212 of the Internal Revenue Code of 1954. That ruling also holds that the deductibility of amounts paid in connection with ordinary cash dividends on stock borrowed under such conditions should be determined by the same standards whether the taxpayer is a trader or an investor.

In view of the position expressed in I.T. 3989, the decisions announced in I.T. 1764 and S.M. 4281 are hereby modified to remove from those rulings the implication that amounts, paid by investors or traders in securities, with respect to ordinary cash dividends on stock borrowed to cover a short sale, are proper adjustments to the basis of the stock purchased to close the short sale.