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Phase-In of Dividend Equivalent Payments Further Extended

The Treasury Department and the IRS have announced in Notice 2018-72 that they intend to amend the IRC Sec. 871(m) “dividend equivalent” regulations to further delay the effective/applicability date of certain of its provisions.  The Notice also extends the phase-in period provided in Notice 2016-76 [for certain provisions of these regulations.  As we have previously noted, these regulations have been and continue to be controversial.  Many in the financial community have argued that they are too expansive, overly complicated and difficult to administer.  Consistent with that position and with Executive Order 13777, the Treasury Department and the IRS “continue to evaluate the section 871(m) regulations and consider possible agency actions that may reduce unnecessary burdens imposed by the regulations.”

Notice 2018-72 provides, in part:

  • The IRC Sec. 871(m) rules will not apply to any payment made with respect to any “non-delta one” transaction issued before January 1, 2021.  “Delta” is the ratio of the change in the fair market value of a notional principal contract (“NPC”) or equity linked instrument (“ELI”) to a small change in the fair market value of the number of shares of the underlying security referenced by the NPC or ELI.  
  • The IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the IRC Sec. 871(m) regulations in enforcing the regulations for (i) any delta-one transactions in 2017 through 2020 and (ii) non-delta one transactions in 2021.
  • The period during which the “simplified standard” for withholding agents to determine whether transactions are “combined transactions” is further extended through 2020.  As noted in Notice 2018-72, a withholding agent will only be required to combine transactions when the transactions are over-the-counter transactions that are priced, marketed, or sold in connection with each other.   Withholding agents will not be required to combine any transactions that are listed securities entered into through 2020.  The simplified standard only applies to withholding agents and does not apply to taxpayers that are long parties to potential IRC Sec. 871(m) transactions.
  • The anti-abuse rule included as part of the IRC Sec. 871(m) regulations continues to apply during the phase-in years described in the Notice.  Accordingly, a transaction that would not otherwise be treated as an IRC Sec. 871(m) transaction (including as a result of this Notice) may be an IRC Sec. 871(m) transaction under the anti-abuse rule.  

Richard Shapiro, Tax Director and member of EisnerAmper Financial Services Group, has over 35 years' experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international.

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