Dividend Equivalents From Sources Within the United States, 3108-3111 [2012-1234]
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Federal Register / Vol. 77, No. 14 / Monday, January 23, 2012 / Rules and Regulations
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punitive damages) received (whether by
suit or agreement and whether as lump
sums or as periodic payments) on
account of personal physical injuries or
physical sickness. Emotional distress is
not considered a physical injury or
physical sickness. However, damages
for emotional distress attributable to a
physical injury or physical sickness are
excluded from income under section
104(a)(2). Section 104(a)(2) also
excludes damages not in excess of the
amount paid for medical care (described
in section 213(d)(1)(A) or (B)) for
emotional distress. For purposes of this
paragraph (c), the term damages means
an amount received (other than workers’
compensation) through prosecution of a
legal suit or action, or through a
settlement agreement entered into in
lieu of prosecution.
(2) Cause of action and remedies. The
section 104(a)(2) exclusion may apply to
damages recovered for a personal
physical injury or physical sickness
under a statute, even if that statute does
not provide for a broad range of
remedies. The injury need not be
defined as a tort under state or common
law.
(3) Effective/applicability date. This
paragraph (c) applies to damages paid
pursuant to a written binding
agreement, court decree, or mediation
award entered into or issued after
September 13, 1995, and received after
January 23, 2012. Taxpayers also may
apply these final regulations to damages
paid pursuant to a written binding
agreement, court decree, or mediation
award entered into or issued after
September 13, 1995, and received after
August 20, 1996. If applying these final
regulations to damages received after
August 20, 1996, results in an
overpayment of tax, the taxpayer may
file a claim for refund before the period
of limitations under section 6511
expires. To qualify for a refund of tax on
damages paid after August 20, 1996,
under a written binding agreement,
court decree, or mediation award
entered into or issued after September
13, 1995, a taxpayer must meet the
requirements of section 1605 of the
Small Business Job Protection Act of
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1996, Public Law 104–188 (110 Stat.
1838).
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Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: December 6, 2011.
Emily S. McMahon,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2012–1255 Filed 1–20–12; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
RIN 1545–BK53
Dividend Equivalents From Sources
Within the United States
Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary regulations.
AGENCY:
This document contains
temporary regulations relating to
dividend equivalents for purposes of
section 871(m) of the Internal Revenue
Code (Code). The regulations provide
guidance to nonresident aliens and
foreign corporations that hold notional
principal contracts (NPCs) providing for
payments determined by reference to
payments of dividends from sources
within the United States. The text of the
temporary regulations also serves as the
text of the proposed regulations set forth
in the notice of proposed rulemaking on
this subject in the Proposed Rules
Section in this issue of the Federal
Register.
DATES: Effective Date: These regulations
are effective January 23, 2012.
Applicability Date: For dates of
applicability, see §§ 1.863–7T(f),1.871–
16T(g), 1.881–2T(f), 1.1441–2T(g),
1.1441–3T(k), 1.1441–4T(h), 1.1441–
7T(h), and 1.1461–1T(j).
FOR FURTHER INFORMATION CONTACT:
Mark E. Erwin or D. Peter Merkel at
(202) 622–3870 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:
Background
This document contains temporary
regulations under section 871(m).
Congress enacted section 871(m)
(originally designated as section 871(l))
on March 18, 2010 in section 541 of the
Hiring Incentives to Restore
Employment Act (HIRE Act), Public
Law 111–147 (124 Stat. 71).
Section 871(m) applies to securities
loans, sale-repurchase transactions
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(repos), certain NPCs defined as
‘‘specified notional principal contracts’’
(specified NPCs), and any similar
transactions that provide for a payment
contingent upon or determined by
reference to a U.S. source dividend
(dividend equivalent). Section 871(m)
treats a dividend equivalent as a
dividend from sources within the
United States for purposes of sections
871(a), 881, and 4948(a), and chapters 3
and 4 of subtitle A of the Code. Section
871(m) generally applies to any
dividend equivalent made after
September 14, 2010. With respect to
payments made after March 18, 2012,
section 871(m)(3)(B) provides that any
NPC will be a specified NPC unless the
Secretary determines that such contract
is of a type which does not have the
potential for tax avoidance.
Notice 2010–46, 2010–24 IRB 757,
outlined a proposed framework for
limiting withholding in the case of a
series of securities lending or salerepurchase transactions. While the
Treasury Department and the IRS
anticipate issuing proposed regulations
addressing the issues raised in Notice
2010–46, these regulations do not
address these concerns. See
§ 601.601(d)(2).
Explanation of Provisions
Section 1.871–16T(b) of these
temporary regulations incorporates the
definition of a specified NPC as
provided in section 871(m)(3)(A). These
temporary regulations extend the
applicability of the section 871(m)(3)(A)
statutory definition of a specified NPC
through December 31, 2012. Proposed
regulations set forth in the notice of
proposed rulemaking on this subject in
the Proposed Rules Section in this issue
of the Federal Register outline the
proposed treatment of dividend
equivalents under section 871(m)
beginning January 1, 2013. The Treasury
Department and the IRS believe that an
extension of the statutory definition of
the term specified NPC is necessary to
allow taxpayers and withholding agents
to modify their systems and other
operating procedures to comply with
the rules described in the notice of
proposed rulemaking.
These temporary regulations also
amend several regulations to clarify the
application of section 871(m). For
example, temporary regulations modify
§ 1.863–7 to provide that that section
does not apply to a dividend equivalent
under section 871(m). Section 1.881–
2T(b)(3) provides that section 871(m)
and § 1.871–16T apply to dividend
equivalents received by foreign
corporations. Certain regulations under
section 1441 have been amended to
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Federal Register / Vol. 77, No. 14 / Monday, January 23, 2012 / Rules and Regulations
require a withholding agent to withhold
tax owed with respect to a dividend
equivalent.
Notwithstanding these temporary
regulations, the Commissioner may
challenge transactions that are designed
to avoid the application of these rules
under applicable judicial doctrines.
Nothing in these rules precludes the
Commissioner from asserting that a
contract labeled as an NPC or other
equity derivative is in fact an ownership
interest in the equity referenced in the
contract.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. For the
applicability of the Regulatory
Flexibility Act (5 U.S.C. chapter 6), refer
to the special analyses section of the
preamble to the cross-reference notice of
proposed rulemaking published in the
proposed rules section in this issue of
the Federal Register. Pursuant to
section 7805(f) of the Code, these
temporary regulations have been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on the
impact on small businesses.
Drafting Information
The principal author of these
regulations is D. Peter Merkel, the Office
of Associate Chief Counsel
(International). Other personnel from
the Treasury Department and the IRS
participated in their development.
§ 1.863–7 Allocation of income attributable
to certain notional principal contracts under
section 863(a).
(a) Scope—(1) Introduction.
[Reserved]. For further guidance, see
§ 1.863–7T(a)(1).
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Par. 3. Section 1.863–7T is added as
follows:
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§ 1.863–7T Allocation of income
attributable to certain notional principal
contracts under section 863(a) (temporary).
(a) Scope—(1) Introduction. This
section provides rules relating to the
source and, in certain cases, the
character of notional principal contract
income. However, this section does not
apply to income from a section 988
transaction within the meaning of
section 988 and the regulations
thereunder, relating to the treatment of
certain nonfunctional currency
transactions. Further, this section does
not apply to a dividend equivalent as
defined in section 871(m) or § 1.871–15.
Notional principal contract income is
income attributable to a notional
principal contract as defined in § 1.446–
3(c). An agreement between a taxpayer
and a qualified business unit (as defined
in section 989(a)) of the taxpayer, or
among qualified business units of the
same taxpayer, is not a notional
principal contract, because a taxpayer
cannot enter into a contract with itself.
(a)(2) through (e) [Reserved]. For
further guidance, see § 1.863–7(a)(2)
through (e).
(f) Effective/applicability date. This
section applies to payments made on or
after January 23, 2012.
(g) Expiration date. This section
expires January 16, 2015.
■ Par. 4. Section 1.871–15T is added
and reserved to read as follows:
§ 1.871–15T Treatment of dividend
equivalents (temporary). [Reserved]
List of Subjects in 26 CFR Part 1
Par. 5. Section 1.871–16T is added to
read as follows:
Income taxes, Reporting and
recordkeeping requirements.
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Amendments to the Regulations
§ 1.871–16T Specified notional principal
contracts (temporary).
Accordingly, 26 CFR part 1 is
amended as follows:
(a) [Reserved].
(b) Specified notional principal
contracts between March 18, 2012 and
January 1, 2013. With respect to
payments made after March 18, 2012
and before January 1, 2013, the term
specified notional principal contract
means any notional principal contract
(as defined in § 1.446–3) if—
(1) In connection with entering into
such contract, any long party to the
contract transfers the underlying
security to any short party to the
contract;
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
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Authority: 26 U.S.C. 871(m) and
7805 * * *
Par. 2. Section 1.863–7 is amended by
revising paragraph (a)(1) to read as
follows:
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(2) In connection with the termination
of such contract, any short party to the
contract transfers the underlying
security to any long party to the
contract;
(3) The underlying security is not
readily tradable on an established
securities market; or
(4) In connection with entering into
such contract, the underlying security is
posted as collateral by any short party
to the contract with any long party to
the contract.
(c) through (f) [Reserved].
(g) Effective/applicability date. This
section applies to payments made on or
after January 23, 2012.
(h) Expiration date. This section
expires January 16, 2015.
■ Par. 6. Section1.881–2 is amended by
adding paragraph (b)(3) to read as
follows:
§ 1.881–2 Taxation of foreign corporations
not engaged in U.S. business.
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(b) * * *
(3) [Reserved]. For further guidance,
see § 1.881–2T(b)(3).
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■ Par. 7. Section 1.881–2T is added as
follows:
§ 1.881–2T Taxation of foreign
corporations not engaged in U.S. business
(temporary).
(a) through (b)(2) [Reserved]. For
further guidance, see § 1.881–2(a)
through (b)(2).
(3) Dividend Equivalents. For rules
applicable to a foreign corporation’s
receipt of a dividend equivalent, see
section 871(m) and § 1.871–16T.
(c) through (e) [Reserved]. For further
guidance, see § 1.881–2(c) through (e).
(f) Effective/applicability date. This
section applies on or after January 23,
2012.
(g) Expiration date. The applicability
of this section expires on January 16,
2015.
■ Par. 8. Section 1.1441–2 is amended
by adding paragraphs (b)(6) and (e)(7) to
read as follows:
§ 1.1441–2 Amounts subject to
withholding.
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(b) * * *
(6) [Reserved]. For further guidance,
see § 1.1441–2T(b)(6).
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(e) * * *
(7) [Reserved]. For further guidance,
see § 1.1441–2T(e)(7).
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■ Par. 9. Section 1.1441–2T is added to
read as follows:
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§ 1.1441–2T Amounts subject to
withholding (temporary).
(a) through (b)(5) [Reserved]. For
further guidance, see § 1.1441–2(a)
through (b)(5).
(6) Dividend equivalents. Amounts
subject to withholding include the
payment of a dividend equivalent
described in section 871(m). For this
purpose, the term payment includes any
gross amount that is used in computing
any net amount that is transferred to or
from the taxpayer under the terms of the
contract.
(c) through (e)(6) [Reserved]. For
further guidance, see § 1.1441–2(c)
through (e)(6).
(7) Rules for dividend equivalents.
With respect to a dividend equivalent
described in section 871(m), a payment
is considered made to a person when
any gross amount is used in computing
any net amount that is transferred to or
from the person under the terms of the
contract pursuant to a transaction
described in section 871(m)(2). When a
dividend equivalent is used to
determine a net payment, the person
entitled to the gross dividend equivalent
is considered to have received a
payment even if that person receives no
payment because the net payment
equals zero or that person makes a net
payment.
(f) [Reserved]. For further guidance,
see § 1.1441–2(f).
(g) Effective/applicability date. This
section applies on or after January 23,
2012.
(h) Expiration date. The applicability
of this section expires on January 16,
2015.
■ Par. 10. Section 1.1441–3 is amended
by redesignating paragraph (h) as
paragraph (j) and adding new
paragraphs (h) and (i) to read as follows:
§ 1.1441–3
withheld.
Determination of amounts to be
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(h) [Reserved]. For further guidance,
see § 1.1441–3T(h).
(i) [Reserved]. For further guidance,
see § 1.1441–3T(i).
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■ Par. 11. Section 1.1441–3T is added to
read as follows:
any net amount that is transferred to or
from the taxpayer.
(2) Procedures for withholding with
respect to a dividend equivalent paid
prior to a notional principal contract
(NPC) becoming a specified NPC.
[Reserved].
(i) Estimate or other determination of
the portion of a distribution attributable
to a dividend equivalent—(1) In general.
In determining the amount subject to
withholding as a dividend equivalent, a
withholding agent may use a
distributing corporation’s estimate or
other determination with respect to the
underlying security (as defined in
section 871(m)(4)(C)) in applying the
provisions of paragraphs (c)(2) through
(c)(4) of this section. However, a
withholding agent that elects to use any
such estimate will be liable for the
amount by which the actual amount
required to be withheld exceeds the
amount actually withheld and
applicable penalties and interest
resulting from its reliance on such
estimate or determination. Failure of the
withholding agent to withhold the
required amount shall not be attributed
to the distributing corporation.
(2) [Reserved]
(j) [Reserved]. For further guidance,
see § 1.1441–3(j).
(k) Effective/applicability date. This
section applies on or after January 23,
2012.
(l) Expiration date. The applicability
of this section expires on January 16,
2015.
■ Par. 12. Section 1.1441–4 is amended
by revising paragraph (a)(3)(i) and
adding paragraph (a)(3)(iii) to read as
follows:
§ 1.1441–4 Exemptions from withholding
for certain effectively connected income
and other amounts.
(a) * * *
(3) * * *
(i) [Reserved]. For further guidance,
see § 1.1441–3T(a)(3)(i).
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(iii) [Reserved]. For further guidance,
see § 1.1441–3T(a)(3)(iii).
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■ Par. 13. Section 1.1441–4T is added to
read as follows:
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§ 1.1441–3T Determination of amounts to
be withheld (temporary).
§ 1.1441–4T Exemptions from withholding
for certain effectively connected income
and other amounts (temporary).
(a) through (g) [Reserved]. For further
guidance, see § 1.1441–3(a) through (g).
(h) Dividend equivalents—(1) In
general. The gross amount of a dividend
equivalent described in section 871(m)
is subject to withholding in an amount
equal to the gross amount of the
dividend equivalent used in computing
(a)(1) through (a)(2) [Reserved]. For
further guidance, see § 1.1441–4(a)(1)
through (a)(2).
(3) Income on notional principal
contracts—(i) General rule. Except as
otherwise provided in paragraph
(a)(3)(iii) of this section, a withholding
agent that pays amounts attributable to
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a notional principal contract described
in § 1.863–7(a) or § 1.988–2(e) shall have
no obligation to withhold on the
amounts paid under the terms of the
notional principal contract regardless of
whether a withholding certificate is
provided. However, a withholding agent
must file returns under § 1.1461–1(b)
and (c) reporting the income that it must
treat as effectively connected with the
conduct of a trade or business in the
United States under the provisions of
this paragraph (a)(3). Except as
otherwise provided in paragraph
(a)(3)(ii) of this section, a withholding
agent must treat the income as
effectively connected with the conduct
of a U.S. trade or business if the income
is paid to, or to the account of, a
qualified business unit of a foreign
person located in the United States or,
if the payment is paid to, or to the
account of, a qualified business unit of
a foreign person located outside the
United States, the withholding agent
knows, or has reason to know, the
payment is effectively connected with
the conduct of a trade or business
within the United States. Income on a
notional principal contract does not
include the amount characterized as
interest under the provisions of § 1.446–
3(g)(4).
(ii) [Reserved]. For further guidance,
see § 1.1441–4(a)(3)(ii).
(iii) Exception for specified notional
principal contracts. A withholding
agent that makes a payment attributable
to a specified notional principal
contract described in section 871(m), or
§ 1.871–16T that is not treated as
effectively connected with the conduct
of a trade or business within the United
States shall have an obligation to
withhold on the amount of such
payment that is a dividend equivalent.
(b) through (g) [Reserved]. For further
guidance, see § 1.1441–4(b) through (g).
(h) Effective/applicability date. This
section applies on or after January 23,
2012.
(i) Expiration date. The applicability
of this section expires on January 16,
2015.
■ Par. 14. Section 1.1441–7 is amended
by:
■ 1. Redesignating paragraph (a)(2) as
paragraph (a)(3) and revising newly
designated paragraph (a)(3).
■ 2. Adding a new paragraph (a)(2).
The revision and addition reads as
follows:
§ 1.1441–7 General provisions relating to
withholding agents.
(a) * * *
(2) [Reserved]. For further guidance,
see § 1.1441–7T(a)(2).
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(3) Examples. The following examples
illustrate the rules of paragraph (a)(1) of
this section:
Examples 1 through 5. [Reserved]. For
further guidance, see § 1.1441–7T(a)(3)
Examples 1 through 5.
Example 6. [Reserved]. For further
guidance, see § 1.1441–7T(a)(3)
Example 6.
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■ Par. 15. Section 1.1441–7T is added to
read as follows:
§ 1.1441–7T General provisions relating to
withholding agents (temporary).
(a)(1) [Reserved]. For further
guidance, see § 1.1441–7(a)(1).
(2) Withholding agent with respect to
dividend equivalents. Each person that
is a party to any contract or arrangement
that provides for the payment of a
dividend equivalent, as defined in
section 871(m), shall be treated as
having control and custody of such
payment.
(3) Examples. The following examples
illustrate the rules of paragraphs (a)(1)
and (a)(2) of this section:
Example 1 through Example 5
[Reserved]. For further guidance, see
§ 1.1441–7(a)(3), Example 1 through
Example 5.
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Example 6. FC, a foreign corporation,
enters into a notional principal contract
(NPC) with Bank X, a bank organized in the
United States. The NPC is a specified NPC for
purposes of section 871(m). FC is the long
party to the contract and Bank X is the short
party. The NPC references a specified
number of shares of dividend-paying
common stock issued by a domestic
corporation. As the long party, FC receives
payments from Bank X based on any
appreciation in the value of the common
stock and dividends paid with respect to the
common stock. As the short party, Bank X
receives payment from FC based on any
depreciation in the value of the common
stock and a payment based on LIBOR. Bank
X is a withholding agent because Bank X is
deemed to have control and custody of a
dividend equivalent as a party to the NPC. If
FC’s tax liability under section 881 has not
been satisfied in full by Bank X as
withholding agent, FC is required to file a
return on Form 1120–F (U.S. Income Tax
Return of a Foreign Corporation).
(b)(1) through (g) [Reserved]. For
further guidance, see § 1.1441–7(b)(1)
through (g).
(h) Effective/applicability date. This
section applies on or after January 23,
2012.
(i) Expiration date. The applicability
of this section expires on January 16,
2015.
■ Par. 16. Section 1.1461–1 is amended
by:
■ 1. Redesignating paragraphs
(c)(2)(i)(L) and (c)(2)(i)(M) as (c)(2)(i)(M)
and (c)(2)(i)(N), respectively.
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■
3. Adding a new paragraph (c)(2)(i)(L).
The addition reads as follows:
§ 1.1461–1
withheld.
Payment and returns of tax
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(c) * * *
(2) * * *
(i) * * *
(L) [Reserved]. For further guidance,
see § 1.1461–1T(c)(2)(L).
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■ Par. 17. Section 1.1461–1T is added
as follows:
§ 1.1461–1T Payment and returns of tax
withheld (temporary).
(a) through (c)(2)(i)(K) [Reserved]. For
further guidance, see § 1.1461–1(a)
through (c)(2)(i)(K).
(L) Dividend equivalents as defined in
section 871(m) and the regulations
thereunder;
(c)(2)(i)(M) through (i) [Reserved]. For
further guidance, see § 1.1461–
1(c)(2)(i)(M) through (i).
(j) Effective/applicability date. This
section applies on or after January 23,
2012.
(k) Expiration date. The applicability
of this section expires on January 16,
2015.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: January 3, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury,
Tax Policy.
[FR Doc. 2012–1234 Filed 1–19–12; 11:15 am]
BILLING CODE 4830–01–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket No. USCG–2011–0532]
RIN 1625–AA00
Safety Zone; Export Grain Terminal
(EGT), Columbia River, Longview, WA
Coast Guard, DHS.
Temporary interim rule; request
for comments.
AGENCY:
ACTION:
The Coast Guard is
establishing a temporary safety zone
around the Export Grain Terminal
located on the Columbia River in
Longview, WA. This safety zone extends
to waters of the Columbia River
approximately between the navigable
channel and the Export Grain Terminal
SUMMARY:
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in Longview, WA. This safety zone is
being implemented to ensure that
protest activities associated with the
opening of the Export Grain Terminal to
maritime traffic does not result in
hazardous navigation conditions in the
area of the terminal’s piers and wharves.
DATES: This rule is effective from
12:01 a.m. on January 23, 2012 until
12:01 a.m. on April 1, 2012. Comments
must be received on or before March 1,
2012.
ADDRESSES: Documents indicated in this
preamble as being available in the
docket are part of docket USCG–2011–
0532 and are available online by going
to https://www.regulations.gov, inserting
USCG–2011–0532 in the ‘‘Keyword’’
box, and then clicking ‘‘Search.’’ They
are also available for inspection or
copying at the Docket Management
Facility (M–30), U.S. Department of
Transportation, West Building Ground
Floor, Room W12–140, 1200 New Jersey
Avenue SE., Washington, DC 20590,
between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
FOR FURTHER INFORMATION CONTACT: If
you have questions on this temporary
rule, call or email BM1 Sylvestre Suga,
Waterways Management Division, Coast
Guard Marine Safety Unit Portland;
telephone (503) 240–9319, email
Sylvestre.G.Suga@uscg.mil. If you have
questions on viewing the docket, call
Renee V. Wright, Program Manager,
Docket Operations, telephone (202)
366–9826.
SUPPLEMENTARY INFORMATION:
Regulatory Information
The Coast Guard is issuing this
temporary interim rule without prior
notice and opportunity to comment
pursuant to authority under section 4(a)
of the Administrative Procedure Act
(APA) (5 U.S.C. 553(b)). This provision
authorizes an agency to issue a rule
without prior notice and opportunity to
comment when the agency for good
cause finds that those procedures are
‘‘impracticable, unnecessary, or contrary
to the public interest.’’
Under 5 U.S.C. 553(b)(B), the Coast
Guard finds that good cause exists for
not publishing a notice of proposed
rulemaking (NPRM) with respect to this
rule because to do so would be contrary
to public interest because delayed
promulgation may result in injury or
damage to the maritime public, vessel
crews, the vessels themselves, and law
enforcement personnel from protest
activities that could occur prior to
conclusion of a notice and comment
period.
On September 8, 2011, a large protest
occurred at the Export Grain Terminal
E:\FR\FM\23JAR1.SGM
23JAR1
]]>Agencies
[Federal Register Volume 77, Number 14 (Monday, January 23, 2012)]
[Rules and Regulations]
[Pages 3108-3111]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1234]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
RIN 1545-BK53
Dividend Equivalents From Sources Within the United States
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations relating to
dividend equivalents for purposes of section 871(m) of the Internal
Revenue Code (Code). The regulations provide guidance to nonresident
aliens and foreign corporations that hold notional principal contracts
(NPCs) providing for payments determined by reference to payments of
dividends from sources within the United States. The text of the
temporary regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules Section in this issue of the Federal
Register.
DATES: Effective Date: These regulations are effective January 23,
2012.
Applicability Date: For dates of applicability, see Sec. Sec.
1.863-7T(f),1.871-16T(g), 1.881-2T(f), 1.1441-2T(g), 1.1441-3T(k),
1.1441-4T(h), 1.1441-7T(h), and 1.1461-1T(j).
FOR FURTHER INFORMATION CONTACT: Mark E. Erwin or D. Peter Merkel at
(202) 622-3870 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains temporary regulations under section 871(m).
Congress enacted section 871(m) (originally designated as section
871(l)) on March 18, 2010 in section 541 of the Hiring Incentives to
Restore Employment Act (HIRE Act), Public Law 111-147 (124 Stat. 71).
Section 871(m) applies to securities loans, sale-repurchase
transactions (repos), certain NPCs defined as ``specified notional
principal contracts'' (specified NPCs), and any similar transactions
that provide for a payment contingent upon or determined by reference
to a U.S. source dividend (dividend equivalent). Section 871(m) treats
a dividend equivalent as a dividend from sources within the United
States for purposes of sections 871(a), 881, and 4948(a), and chapters
3 and 4 of subtitle A of the Code. Section 871(m) generally applies to
any dividend equivalent made after September 14, 2010. With respect to
payments made after March 18, 2012, section 871(m)(3)(B) provides that
any NPC will be a specified NPC unless the Secretary determines that
such contract is of a type which does not have the potential for tax
avoidance.
Notice 2010-46, 2010-24 IRB 757, outlined a proposed framework for
limiting withholding in the case of a series of securities lending or
sale-repurchase transactions. While the Treasury Department and the IRS
anticipate issuing proposed regulations addressing the issues raised in
Notice 2010-46, these regulations do not address these concerns. See
Sec. 601.601(d)(2).
Explanation of Provisions
Section 1.871-16T(b) of these temporary regulations incorporates
the definition of a specified NPC as provided in section 871(m)(3)(A).
These temporary regulations extend the applicability of the section
871(m)(3)(A) statutory definition of a specified NPC through December
31, 2012. Proposed regulations set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules Section in this issue
of the Federal Register outline the proposed treatment of dividend
equivalents under section 871(m) beginning January 1, 2013. The
Treasury Department and the IRS believe that an extension of the
statutory definition of the term specified NPC is necessary to allow
taxpayers and withholding agents to modify their systems and other
operating procedures to comply with the rules described in the notice
of proposed rulemaking.
These temporary regulations also amend several regulations to
clarify the application of section 871(m). For example, temporary
regulations modify Sec. 1.863-7 to provide that that section does not
apply to a dividend equivalent under section 871(m). Section 1.881-
2T(b)(3) provides that section 871(m) and Sec. 1.871-16T apply to
dividend equivalents received by foreign corporations. Certain
regulations under section 1441 have been amended to
[[Page 3109]]
require a withholding agent to withhold tax owed with respect to a
dividend equivalent.
Notwithstanding these temporary regulations, the Commissioner may
challenge transactions that are designed to avoid the application of
these rules under applicable judicial doctrines. Nothing in these rules
precludes the Commissioner from asserting that a contract labeled as an
NPC or other equity derivative is in fact an ownership interest in the
equity referenced in the contract.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. For the
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6),
refer to the special analyses section of the preamble to the cross-
reference notice of proposed rulemaking published in the proposed rules
section in this issue of the Federal Register. Pursuant to section
7805(f) of the Code, these temporary regulations have been submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on the impact on small businesses.
Drafting Information
The principal author of these regulations is D. Peter Merkel, the
Office of Associate Chief Counsel (International). Other personnel from
the Treasury Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 871(m) and 7805 * * *
0
Par. 2. Section 1.863-7 is amended by revising paragraph (a)(1) to read
as follows:
Sec. 1.863-7 Allocation of income attributable to certain notional
principal contracts under section 863(a).
(a) Scope--(1) Introduction. [Reserved]. For further guidance, see
Sec. 1.863-7T(a)(1).
* * * * *
0
Par. 3. Section 1.863-7T is added as follows:
Sec. 1.863-7T Allocation of income attributable to certain notional
principal contracts under section 863(a) (temporary).
(a) Scope--(1) Introduction. This section provides rules relating
to the source and, in certain cases, the character of notional
principal contract income. However, this section does not apply to
income from a section 988 transaction within the meaning of section 988
and the regulations thereunder, relating to the treatment of certain
nonfunctional currency transactions. Further, this section does not
apply to a dividend equivalent as defined in section 871(m) or Sec.
1.871-15. Notional principal contract income is income attributable to
a notional principal contract as defined in Sec. 1.446-3(c). An
agreement between a taxpayer and a qualified business unit (as defined
in section 989(a)) of the taxpayer, or among qualified business units
of the same taxpayer, is not a notional principal contract, because a
taxpayer cannot enter into a contract with itself.
(a)(2) through (e) [Reserved]. For further guidance, see Sec.
1.863-7(a)(2) through (e).
(f) Effective/applicability date. This section applies to payments
made on or after January 23, 2012.
(g) Expiration date. This section expires January 16, 2015.
0
Par. 4. Section 1.871-15T is added and reserved to read as follows:
Sec. 1.871-15T Treatment of dividend equivalents (temporary).
[Reserved]
0
Par. 5. Section 1.871-16T is added to read as follows:
Sec. 1.871-16T Specified notional principal contracts (temporary).
(a) [Reserved].
(b) Specified notional principal contracts between March 18, 2012
and January 1, 2013. With respect to payments made after March 18, 2012
and before January 1, 2013, the term specified notional principal
contract means any notional principal contract (as defined in Sec.
1.446-3) if--
(1) In connection with entering into such contract, any long party
to the contract transfers the underlying security to any short party to
the contract;
(2) In connection with the termination of such contract, any short
party to the contract transfers the underlying security to any long
party to the contract;
(3) The underlying security is not readily tradable on an
established securities market; or
(4) In connection with entering into such contract, the underlying
security is posted as collateral by any short party to the contract
with any long party to the contract.
(c) through (f) [Reserved].
(g) Effective/applicability date. This section applies to payments
made on or after January 23, 2012.
(h) Expiration date. This section expires January 16, 2015.
0
Par. 6. Section1.881-2 is amended by adding paragraph (b)(3) to read as
follows:
Sec. 1.881-2 Taxation of foreign corporations not engaged in U.S.
business.
* * * * *
(b) * * *
(3) [Reserved]. For further guidance, see Sec. 1.881-2T(b)(3).
* * * * *
0
Par. 7. Section 1.881-2T is added as follows:
Sec. 1.881-2T Taxation of foreign corporations not engaged in U.S.
business (temporary).
(a) through (b)(2) [Reserved]. For further guidance, see Sec.
1.881-2(a) through (b)(2).
(3) Dividend Equivalents. For rules applicable to a foreign
corporation's receipt of a dividend equivalent, see section 871(m) and
Sec. 1.871-16T.
(c) through (e) [Reserved]. For further guidance, see Sec. 1.881-
2(c) through (e).
(f) Effective/applicability date. This section applies on or after
January 23, 2012.
(g) Expiration date. The applicability of this section expires on
January 16, 2015.
0
Par. 8. Section 1.1441-2 is amended by adding paragraphs (b)(6) and
(e)(7) to read as follows:
Sec. 1.1441-2 Amounts subject to withholding.
* * * * *
(b) * * *
(6) [Reserved]. For further guidance, see Sec. 1.1441-2T(b)(6).
* * * * *
(e) * * *
(7) [Reserved]. For further guidance, see Sec. 1.1441-2T(e)(7).
* * * * *
0
Par. 9. Section 1.1441-2T is added to read as follows:
[[Page 3110]]
Sec. 1.1441-2T Amounts subject to withholding (temporary).
(a) through (b)(5) [Reserved]. For further guidance, see Sec.
1.1441-2(a) through (b)(5).
(6) Dividend equivalents. Amounts subject to withholding include
the payment of a dividend equivalent described in section 871(m). For
this purpose, the term payment includes any gross amount that is used
in computing any net amount that is transferred to or from the taxpayer
under the terms of the contract.
(c) through (e)(6) [Reserved]. For further guidance, see Sec.
1.1441-2(c) through (e)(6).
(7) Rules for dividend equivalents. With respect to a dividend
equivalent described in section 871(m), a payment is considered made to
a person when any gross amount is used in computing any net amount that
is transferred to or from the person under the terms of the contract
pursuant to a transaction described in section 871(m)(2). When a
dividend equivalent is used to determine a net payment, the person
entitled to the gross dividend equivalent is considered to have
received a payment even if that person receives no payment because the
net payment equals zero or that person makes a net payment.
(f) [Reserved]. For further guidance, see Sec. 1.1441-2(f).
(g) Effective/applicability date. This section applies on or after
January 23, 2012.
(h) Expiration date. The applicability of this section expires on
January 16, 2015.
0
Par. 10. Section 1.1441-3 is amended by redesignating paragraph (h) as
paragraph (j) and adding new paragraphs (h) and (i) to read as follows:
Sec. 1.1441-3 Determination of amounts to be withheld.
* * * * *
(h) [Reserved]. For further guidance, see Sec. 1.1441-3T(h).
(i) [Reserved]. For further guidance, see Sec. 1.1441-3T(i).
* * * * *
0
Par. 11. Section 1.1441-3T is added to read as follows:
Sec. 1.1441-3T Determination of amounts to be withheld (temporary).
(a) through (g) [Reserved]. For further guidance, see Sec. 1.1441-
3(a) through (g).
(h) Dividend equivalents--(1) In general. The gross amount of a
dividend equivalent described in section 871(m) is subject to
withholding in an amount equal to the gross amount of the dividend
equivalent used in computing any net amount that is transferred to or
from the taxpayer.
(2) Procedures for withholding with respect to a dividend
equivalent paid prior to a notional principal contract (NPC) becoming a
specified NPC. [Reserved].
(i) Estimate or other determination of the portion of a
distribution attributable to a dividend equivalent--(1) In general. In
determining the amount subject to withholding as a dividend equivalent,
a withholding agent may use a distributing corporation's estimate or
other determination with respect to the underlying security (as defined
in section 871(m)(4)(C)) in applying the provisions of paragraphs
(c)(2) through (c)(4) of this section. However, a withholding agent
that elects to use any such estimate will be liable for the amount by
which the actual amount required to be withheld exceeds the amount
actually withheld and applicable penalties and interest resulting from
its reliance on such estimate or determination. Failure of the
withholding agent to withhold the required amount shall not be
attributed to the distributing corporation.
(2) [Reserved]
(j) [Reserved]. For further guidance, see Sec. 1.1441-3(j).
(k) Effective/applicability date. This section applies on or after
January 23, 2012.
(l) Expiration date. The applicability of this section expires on
January 16, 2015.
0
Par. 12. Section 1.1441-4 is amended by revising paragraph (a)(3)(i)
and adding paragraph (a)(3)(iii) to read as follows:
Sec. 1.1441-4 Exemptions from withholding for certain effectively
connected income and other amounts.
(a) * * *
(3) * * *
(i) [Reserved]. For further guidance, see Sec. 1.1441-3T(a)(3)(i).
* * * * *
(iii) [Reserved]. For further guidance, see Sec. 1.1441-
3T(a)(3)(iii).
* * * * *
0
Par. 13. Section 1.1441-4T is added to read as follows:
Sec. 1.1441-4T Exemptions from withholding for certain effectively
connected income and other amounts (temporary).
(a)(1) through (a)(2) [Reserved]. For further guidance, see Sec.
1.1441-4(a)(1) through (a)(2).
(3) Income on notional principal contracts--(i) General rule.
Except as otherwise provided in paragraph (a)(3)(iii) of this section,
a withholding agent that pays amounts attributable to a notional
principal contract described in Sec. 1.863-7(a) or Sec. 1.988-2(e)
shall have no obligation to withhold on the amounts paid under the
terms of the notional principal contract regardless of whether a
withholding certificate is provided. However, a withholding agent must
file returns under Sec. 1.1461-1(b) and (c) reporting the income that
it must treat as effectively connected with the conduct of a trade or
business in the United States under the provisions of this paragraph
(a)(3). Except as otherwise provided in paragraph (a)(3)(ii) of this
section, a withholding agent must treat the income as effectively
connected with the conduct of a U.S. trade or business if the income is
paid to, or to the account of, a qualified business unit of a foreign
person located in the United States or, if the payment is paid to, or
to the account of, a qualified business unit of a foreign person
located outside the United States, the withholding agent knows, or has
reason to know, the payment is effectively connected with the conduct
of a trade or business within the United States. Income on a notional
principal contract does not include the amount characterized as
interest under the provisions of Sec. 1.446-3(g)(4).
(ii) [Reserved]. For further guidance, see Sec. 1.1441-
4(a)(3)(ii).
(iii) Exception for specified notional principal contracts. A
withholding agent that makes a payment attributable to a specified
notional principal contract described in section 871(m), or Sec.
1.871-16T that is not treated as effectively connected with the conduct
of a trade or business within the United States shall have an
obligation to withhold on the amount of such payment that is a dividend
equivalent.
(b) through (g) [Reserved]. For further guidance, see Sec. 1.1441-
4(b) through (g).
(h) Effective/applicability date. This section applies on or after
January 23, 2012.
(i) Expiration date. The applicability of this section expires on
January 16, 2015.
0
Par. 14. Section 1.1441-7 is amended by:
0
1. Redesignating paragraph (a)(2) as paragraph (a)(3) and revising
newly designated paragraph (a)(3).
0
2. Adding a new paragraph (a)(2).
The revision and addition reads as follows:
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) * * *
(2) [Reserved]. For further guidance, see Sec. 1.1441-7T(a)(2).
[[Page 3111]]
(3) Examples. The following examples illustrate the rules of
paragraph (a)(1) of this section:
Examples 1 through 5. [Reserved]. For further guidance, see Sec.
1.1441-7T(a)(3) Examples 1 through 5.
Example 6. [Reserved]. For further guidance, see Sec. 1.1441-
7T(a)(3) Example 6.
* * * * *
0
Par. 15. Section 1.1441-7T is added to read as follows:
Sec. 1.1441-7T General provisions relating to withholding agents
(temporary).
(a)(1) [Reserved]. For further guidance, see Sec. 1.1441-7(a)(1).
(2) Withholding agent with respect to dividend equivalents. Each
person that is a party to any contract or arrangement that provides for
the payment of a dividend equivalent, as defined in section 871(m),
shall be treated as having control and custody of such payment.
(3) Examples. The following examples illustrate the rules of
paragraphs (a)(1) and (a)(2) of this section:
Example 1 through Example 5 [Reserved]. For further guidance, see
Sec. 1.1441-7(a)(3), Example 1 through Example 5.
Example 6. FC, a foreign corporation, enters into a notional
principal contract (NPC) with Bank X, a bank organized in the United
States. The NPC is a specified NPC for purposes of section 871(m).
FC is the long party to the contract and Bank X is the short party.
The NPC references a specified number of shares of dividend-paying
common stock issued by a domestic corporation. As the long party, FC
receives payments from Bank X based on any appreciation in the value
of the common stock and dividends paid with respect to the common
stock. As the short party, Bank X receives payment from FC based on
any depreciation in the value of the common stock and a payment
based on LIBOR. Bank X is a withholding agent because Bank X is
deemed to have control and custody of a dividend equivalent as a
party to the NPC. If FC's tax liability under section 881 has not
been satisfied in full by Bank X as withholding agent, FC is
required to file a return on Form 1120-F (U.S. Income Tax Return of
a Foreign Corporation).
(b)(1) through (g) [Reserved]. For further guidance, see Sec.
1.1441-7(b)(1) through (g).
(h) Effective/applicability date. This section applies on or after
January 23, 2012.
(i) Expiration date. The applicability of this section expires on
January 16, 2015.
0
Par. 16. Section 1.1461-1 is amended by:
0
1. Redesignating paragraphs (c)(2)(i)(L) and (c)(2)(i)(M) as
(c)(2)(i)(M) and (c)(2)(i)(N), respectively.
0
3. Adding a new paragraph (c)(2)(i)(L).
The addition reads as follows:
Sec. 1.1461-1 Payment and returns of tax withheld.
* * * * *
(c) * * *
(2) * * *
(i) * * *
(L) [Reserved]. For further guidance, see Sec. 1.1461-1T(c)(2)(L).
* * * * *
0
Par. 17. Section 1.1461-1T is added as follows:
Sec. 1.1461-1T Payment and returns of tax withheld (temporary).
(a) through (c)(2)(i)(K) [Reserved]. For further guidance, see
Sec. 1.1461-1(a) through (c)(2)(i)(K).
(L) Dividend equivalents as defined in section 871(m) and the
regulations thereunder;
(c)(2)(i)(M) through (i) [Reserved]. For further guidance, see
Sec. 1.1461-1(c)(2)(i)(M) through (i).
(j) Effective/applicability date. This section applies on or after
January 23, 2012.
(k) Expiration date. The applicability of this section expires on
January 16, 2015.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: January 3, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury, Tax Policy.
[FR Doc. 2012-1234 Filed 1-19-12; 11:15 am]
BILLING CODE 4830-01-P
