Is my broker allowed to loan my securities that I have in my marging account only if and when I actually have a debit balance, or also if I have only stocks and a credit balance in my margin account? While most sources recommend I put my dividend paying stocks in a cash account rather than a margin account (to avoid the unfavorable tax treatement of "in lieu" payments), the following three citations suggest a broker can only do it when I have actually bought the shares on margin. However I have not found a law saying this (or even know where I would have to look). My broker assigned me huge amounts of "in lieu" payments, although I never had a loan balance. Can anybody clarify please. I need to find the regulation/law, especially the one with the 140% rule in the below citations. Thanks! (1) http://www.taxpolicycenter.org/newsevents/cite_guide_may.cfm If you borrow in a margin account, there's a risk--not a big one, but a risk--that some of your dividends won't qualify for the 15% rate. It works like this: The brokerage firm is permitted to borrow stock from your account worth up to 140% of your outstanding loan balance and lend it to short sellers. If your stock is sold short when a dividend is paid, you get a "payment in lieu of dividends," which is taxed at ordinary income rates of up to 35% and reported on a 1099-Misc.vents/cite_guide_may.cfm (2) http://www.freetrade.com/forms/FRE086.pdf Free Stock â loanable securities; that is, securities that can be used for loan or hypothecation. These securities are stock in a margin account that represents a percentage (140%) of the debit balance. (3) http://www.sfgate.com/cgi-bin/artic...ive/2004/08/12/BUG5C86BUJ1.DTL&type=printable To receive an in-lieu payment, an investor must have a margin account, have a balance in the account (meaning he has borrowed money to buy securities) and have his shares loaned out. ... Investors who have margin balances should check their brokers' policy on in-lieu payments and be aware of the tax implications when they file their 2004 returns.