Pub 550 says:
"If you close the short sale by the 45th day after the date of the short sale (1 year or less in the case of an extraordinary dividend), you cannot deduct the payment in lieu of the dividend you make to the lender. Instead, you must increase the basis of the stock used to close the short sale by that amount."
and then
"Exception.
If you close the short sale within 45 days, the deduction for amounts you pay in lieu of dividends will be disallowed only to the extent the payments are more than the amount you receive as ordinary income from the lender of the stock for the use of collateral with the short sale. "
What does the Exception mean? It does not seem to make sense since if you close the short sale within 45 days, you can't take a deduction, period. You are directed to adjust the cost basis.
So, can I add the dividend amount to the basis if I closed the short sale in under 45 days or not? I did not receive any payments from the lender of the stock (i.e., from my broker) for its use. Does anyone get such payments?
