This does not sound correct. The amount of "Substitute Payments in Lieu of Dividends or Interest" is shown in Form 8960 Line 7 "Other modifications to investment income" for Net Investment Income Tax (for tax payers with income requiring NIIT). Thus the "payment in lieu" is taxed as a investment income for purposes of NIIT (Form 8960).
However, for purposes of "Investment Interest Expense Deduction" Form 4952, line 4a does NOT include these "payments in lieu".
Thus a taxpayer has to pay 3.8% NIIT tax (if income applies) for their substitute payment, but they don't get to apply it for deduction purposes if they have investment expenses. This looks like a bug!
As you indicated, YES the substitute payment should be taxed at the ordinary income tax rate, however it is STILL investment income, and should be included in 4952
Can you please fix this!?
In my 2022 tax return, Form 4952 4a "Gross income for property" equals my Form 8960 Line 1 and 2 (taxable interest + ordinary dividends) but does not include my Form 8960 Line 7 (other modifications to investment income). Thus turbox DOES see this as "investment income"... it's NOT earned income.
