I know that when a bond is sold short, the seller (the holder of the
short position) in effect MAKES coupon payments on the bond.  However,
the seller does not actually make payments to the buyer, since the
buyer, as owner of record, will get the coupon payments from the
issuer.

Can someone please explain to me how the holder of the short position
in effect makes coupon payments?

The short answer, without citations, is that the payment you make as
the "short seller" is to the "owner/lender," not the buyer. The buyer
(of record) receives the interest coupon. However, the "owner" also
wants the "missing" coupon. His broker makes a claim for that amount
from your broker, which pays it and bills your account. They make the
claim on the basis of their internal "securities lent" and "securities
borrowed" records. At this point, then, you have "borrowed one
security and one interest payment" from the owner and repaid "one
interest payment." The downstream "buyer" remains blissfully unaware
of all this background action.

Thanks for your response.  But, if the "buyer" is the owner of record
from the "sale" and gets a coupon pmt from the issuer, who is the
owner of record of the bonds borrowed by the "short seller"?

If it is the "short seller" then wouldn't the "short seller" receive a
coupon payment from the issuer and then the "lender" would make a
claim for the payment, thereby making the it a non-cash event for the
"short seller" since it is just passing the payment on (and in effect
not making a coupon payment)?

Or, if the "lender" is the owner of record for the borrowed bonds,
then wouldn't the lender receive the payment from the issuer, thereby
not having to collect from the "borrower"?  Hence, it is again a
non-cash event for the borrower?

The problem I have is that in this scenario I see only two owners of
record for the bonds, but three coupon payments:  one to the "buyer"
from the issuer as an owner of record, one to the "lender" from the
issuer as an owner of record, and one from the "borrower" to the
"lender".  Seems to me there should only be two payments, both from
the issuer to the two owners of record.  But if the "borrower" is also
making a coupon payment (to the lender), then wouldn't that be one
payment too many???

In my company we short bonds and cover the shorts by borrowing the
bonds on Repo.  If we are in possession of borrowed bonds on the
coupon record date, the lender makes a claim to us for the coupon
payment.  The missing piece to this is, who gets the coupon payment
FROM THE ISSUER relating to the bonds we have borrowed?  If we get it
(because we are in possession of the bonds) and pass it on to the
lender, then it is a wash for us, yet I know somehow we, at least
"effectively", incur a coupon payment for being short the bonds.  If
the lender gets it (even though he's loaned them to us) then why would
he make a claim for it from us??

Sorry for babbling.  Any more help is greatly appreciated.

I think the underlying difficulty in this area is that you are dealing
with a three party transaction, so you have to stop looking for
something flowing back each step of the way. It's easier to follow if
you cut it up into lots of steps, and always keep in mind, there is
only one "bond" - like the sidewalk teacup scams, keep your eye on the
ball:

(1) In the pre-short state, Owner had a bond, Seller did not, and
Buyer did not. The title was in Owner's name.
(2)At the time of the short sale, Owner hands/lends Seller the Bond
(or Seller's Broker, i.e.) who then turns around and hands it to the
Buyer. Buyer hands cash for the Bond back to Seller. Thus, at this
point, Owner has an "iou" from Seller/Seller's Broker, Seller has some
cash and owes the "iou," and Buyer has a bond now duly registered in
Buyer's name.
(3) When the coupon is paid, only one check goes out, to Buyer. That's
the only "real" bond out there.
(4) That same day, whenever interest is paid by the issuer, Owner's
broker reminds Seller's broker that Seller promised to "make good" on
anything paid on the bond while it was on loan; Seller's Broker
settles up, and charges Seller.
(5) The trick is to start viewing the "short sale" as a "stream of
payments," not as a "one time event" ... the risk (including payments
due the lender in lieu of coupons, and interest on the amount
borrowed) grows with time...until you close out the short.

sometimes we confuse ourselves by making things too technical thereby
complicating what at it's core is a fairly straight forward operation.
i am going to skip all the backroom due bills and interactions between
brokerage firms and attempt to boil this down to a few sentences.

there are three parties in your transaction. a buyer, a short seller,
and an owner. clearly the owner is entitled to an interest payment he
owns the bond. clearly the buyer is entitled to an interest payment,
he also bought and now owns the bond. clearly we now have two owners
of the same instrument each entitled to and expecting a check on the
payment date. clearly, the issuer is only going to issue one payment,
leaving one of our owners bitterly disappointed. the obligation of the
short seller, who never owned and continues to not own any assets in
the transaction is obligated by his actions to make one of the owners
whole. in selling something he didn't own, he in effect created a
security and is now obligated as is the issuer to make payments on his
creation until it is retired.

one of the problems in the scenario as you created it is that the
short seller is not, as you assumed, a holder of record. he was never
on the books of the issuer. think about that for a minute. how could
he be a record holder? holder of what? he never owned anything.

i also suggest that your attempt to identify holders of record is
causing you a problem. the most likely scenario is that the two long
positions are in street name. the issuer then pays in bulk to the
brokerage firms who then in turn distribute the funds to the proper
holding accounts. if you are determined to have a registered security
in your example only the buyer can actually take delivery. he engaged
in a simply purchase and owns the bond. the short seller owns nothing
and hence has nothing to register. the owner can't register and take
delivery because his ownership has been assigned by loan elsewhere.
you can't register and hold what you have lent out. like a five dollar
bill. i can't lend it to you and keep it in my pocket at the same
time.

well that went more than the few sentences i promised. frankly it
covers the same ground as the previous reply but in different text. i
hope that lent some perspective to your inquiry.

Thanks very much to both of you.  Your answers cleared it up for me. 
I was missing the point that the short seller in effect creates
another bond (synthetic) and issues it.  It must pay the cash flows
relating to it.  Thanks again.