The Treasury Department and IRS intend to change the Code Sec. 871(m) regulations to delay the effective date of certain rules in the final regulations. Code Sec. 871(m) treats dividend equivalent payments as U.S. source dividends. Further, certain phase-in periods provided in Notice 2016-76, I.R.B. 2016-51, 834, and in Rev. Proc. 2017-15, I.R.B. 2017-3, 437, are extended for an additional year. The anti-abuse rule in Reg. §1.871-15(o) will continue to apply during the phase-in period. Taxpayers can rely on this guidance before the amendments to the Code Sec. 871(m) regulations and the 2017 QI Agreement are published.
Delta-one and non-delta-one transactions
The Treasury Department and IRS intend to change the effective date of the Reg. §1.871-15(d)(2) rules for determining specified notional principal contract (NPC) status on or after January 1, 2017. They also intend to change the Reg. §1.871-15(e) rules for determining specified equity-linked instrument (ELI) status. These rules will not apply to any payment made with respect to any non-delta-one transaction issued before January 1, 2019. This does not apply to any Code Sec. 871(m) transaction under Reg. §1.871-15(d)(1) regarding specified NPC status before January 1, 2017.
The Notice 2016-76 periods for applying the enforcement standards are extended. The IRS will consider the extent to which the taxpayer or withholding agent made a good faith effort to comply with the Code Sec. 871(m) regulations in enforcing them for:
(1) any delta-one transaction in 2017 and 2018, and
(2) any non-delta-one transaction that is a Code Sec. 871(m) transaction under Reg. §§1.871-15(d)(2) or (e) in 2019.
Similarly, the period during which the IRS will take into account the extent to which a qualified derivatives dealer (QDD) made a good faith effort to comply with the Code Sec. 871(m) regulations and the relevant provisions of the 2017 Qualified Intermediary (QI) Agreement is extended through 2018. The IRS intends to revise the 2017 QI Agreement so that a QDD can satisfy the obligations that apply specifically to a QDD under that agreement for 2018, so long as the QDD makes a good faith effort to comply with the relevant provisions of the 2017 QI Agreement.
Simplified standard for determining combined transactions
The period of the simplified standard set forth in Notice 2016-76 , which withholding agents apply to determine whether transactions entered into in 2017 are combined transactions under Reg. §1.871-15(n) , is extended to include 2018. Transactions entered into in 2017 and 2018 that are combined under the simplified standard will continue to be treated as combined transactions for future years and will not stop being combined transactions due to applying Reg. §1.871-15(n) or disposing of less than all of the potential Code Sec. 871(m) transactions that are combined under the rule. Transactions entered into in 2017 and 2018 that are not combined under the simplified standard will not become combined transactions due to applying Reg. §1.871-15(n) to these transactions in future years, unless a reissuance or other event causes the transactions to be retested to determine whether they are Code Sec. 871(m) transactions.
Additional relief for qualified derivatives dealers
The Treasury Department and the IRS intend to amend Reg. §1.871-15(q)(1) and (r)(3) , and Reg. §1.1441-1(b)(4)(xxii)(C) , so that a QDD will not be subject to tax on dividends and dividend equivalents received in 2017 and 2018 in its equity derivatives dealer capacity or withholding on dividends, including deemed dividends.
A QDD will be required to compute its Code Sec. 871(m) amount using the net delta approach beginning in 2019. This extends by one year the relief set forth in Rev. Proc. 2017-15 , which provided that use of the net delta approach by one year would begin in 2018. A QDD will remain liable for tax under Code Sec. 881(a)(1) on dividends and dividend equivalents that it receives in any capacity other than as an equity derivatives dealer, and on any other U.S. source FDAP payments that it receives. A QDD also is responsible for withholding on dividend equivalents it pays to a foreign person on a Code Sec. 871(m) transaction, whether acting in its capacity as an equity derivatives dealer or otherwise.
A QDD is not required to perform a periodic review with respect to its QDD activities for calendar year 2017 and 2018, thus extending the relief provided by the 2017 QI Agreement. A QI that is a QDD must choose 2019 or a later year within its periodic review period in which to perform its periodic review unless its applicable periodic review period ends in 2018 or an earlier year.
Notice 2017-42, 2017FED ¶46,325
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