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Phase-In of Dividend Equivalent Payment Regulations Extended Again

Jan 8, 2020

In Notice 2020-02, the IRS and Treasury Department announced that they intend to amend the dividend equivalent regulations under IRC Sec. 871(m) to delay yet again the effective/applicability date.  And, most importantly, the transition relief provided in Notice 2018-72 has been extended for two additional years. 

Consistent with Executive Order 13777, the Notice advises that the IRS and Treasury Department continue to evaluate the IRC Sec. 871(m) regulations and consider possible actions that may reduce unnecessary burdens imposed by the regulations. 

Notice 2020-02 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, 2023. “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 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 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. 
  • 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 2022 and (ii) non-delta-one transactions in 2023.
  • The period during which the “simplified standard” for withholding agents to determine whether transactions are “combined transactions” is further extended through 2022. As noted in Notice 2020-02, 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 2022.  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.

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Alexander Turk

Alexander Turk is a Senior Tax Manager and a member of the Financial Services Group.

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