Thank you very much Spino (and everyone else who replied) for your detailed explanation. I am now reconciled to owing income tax on the gross dividend amount even though I only received the net dividend. In addition to your excellent explanation, I found the following regarding this situation in IRS Publication 550:
Dividends Used To Buy More Stock
The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. If you use your dividends to buy more stock at a price equal to its fair market value, you must still report the dividends as income.
If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.
You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge.
In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date.
I still think this tax treatment is illogical and inconsistent - for example, if I receive $100 in interest income from a bank CD, the bank doesn't say "if we didn't have operating expenses, we could have paid you $110 in interest, so report your interest income as $110." However, I understand tax law is not always logical. Thank you again!
Paul
