Phase-In of Dividend Equivalent Payment Withholding Extended by IRS
With the release of Notice 2017-42, the IRS has announced that it will amend the IRC Sec. 871(m) “dividend equivalent” final regulations to delay the effective 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.
IRC Sec. 871(m) regulations have been controversial since they were first proposed in 2012, some arguing that they are too expansive and overly complicated in their current form. Though the IRC Sec. 871(m) regulations were not included as one of the eight tax regulations recently identified by the IRS and the Treasury Department as “imposing financial burdens or adding undue complexity”, it is not surprising that the IRS and the Treasury Department are nonetheless focusing on the IRC Sec. 871(m) regulations. Indeed, Notice 2017-42 states that “… consistent with Executive Order 13777 (82 FR 12285), 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.”
Specifically regarding the extended phase-in implementation, Notice 2017-42 notes the following:
- Payments on or after January 1, 2019 (an extension of one year) made with respect to any non-delta-one transaction issued on or after January 1, 2019 will be subject to the IRC Sec. 871(m) regulations. As noted in prior alerts, “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 implementation for non-delta-one transactions was initially scheduled to be phased in during 2018.
- 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 (1) any delta-one transactions in 2017 and 2018 and (2) any non-delta-one transactions in 2019.
- The period during which the “simplified standard” for withholding agents to determine whether transactions are combined transactions is extended to 2018. As noted in Notice 2016-76, 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 in 2017 or 2018. 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 Notice also provides certain relief for qualified derivatives dealers.
- 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. As a result, a transaction that would not otherwise be treated as an IRC Sec. 871(m) transaction (including as a result of Notice 2017-42) may be an IRC Sec. 871(m) transaction under the anti-abuse rule.