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Notice 2018-72: Extensions of phase-in, transition rules under section 871(m)

Phase-in, transition rules under section 871(m)

The IRS today released an advance version of Notice 2018-72 concerning withholding in the context of securities lending and sale repurchase agreements under section 871(m).

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Notice 2018-72 [PDF 36 KB]:

  • Announces the Treasury Department and IRS intend to amend the regulations under section 871(m) to delay the effective date of certain provisions
  • Provides additional guidance for complying with the regulations under section 871(m) in 2019, 2020, and 2021
  • Extends a phase-in period that was previously provided by Notice 2016-76 for certain provisions of the section 871(m) regulations 
  • Permits withholding agents to apply the transition rules from Notice 2010-46 in 2020

Background

Final regulations and temporary regulations—referred to as the “section 871(m) regulations”—were promulgated in September 2015 as guidance with respect to withholding on payments made to a qualified securities lender (QSL).

The IRS in late 2016 issued Notice 2016-76 to delay the effective date of certain portions of the section 871(m) regulations; to provide guidance for complying with the section 871(m) regulations; and to provide a phase-in schedule for certain rules under the section 871(m) regulations. The delayed application of the regulations was based on an understanding that certain taxpayers faced additional challenges applying for status as a “qualified derivatives dealer” (QDD) under the qualified intermediary (QI) withholding agreement (QI agreement) and in implementing the QDD regime in a timely manner. Read TaxNewsFlash

The IRS then in January 2017 published Rev. Proc. 2017-15 that contains a final QI agreement (the “2017 QI agreement”) that included requirements and obligations that apply to QDDs.

Shortly after that, the IRS and Treasury also in January 2017 released final and temporary regulations (the “2017 regulations”) providing rules relating to dividend equivalents for purposes of section 871(m). The effective and applicability dates in the final regulations reflected the phased-in application rules as provided under Notice 2016-76. Read TaxNewsFlash

Later, the IRS issued Notice 2017-42 that extended certain of the transition relief rules, and Notice 2018-5 that permitted withholding agents to apply the transition rules from Notice 2010-46 in 2018 and 2019.

Dealers, issuers, and other withholding agents have indicated that the phase-in period for delta-one transactions provided in prior guidance has allowed them “valuable time to test and further develop their withholding and reporting systems.” Those making comments requested that the transition relief in Notice 2017-42 and Notice 2018-5 be extended on a permanent basis and that additional time be allowed for more testing and withholding on non-delta-one transactions. Also, comments requested that the QSL regime be extended for a longer transition period.

Notice 2018-72

Extended phase-in year for delta-one and non-delta-one transactions

Notice 2018-72 provides extensions of the phase-in year for delta-one and non-delta-one transactions, and if the the “good faith effort” standard applies:

  • The extended period applies to any delta-one transaction in 2017 through 2020.
  • The extended period applies to any non-delta-one transaction that is a “section 871(m) transaction” in 2021.

Notice 2018-72 also extends through 2020 the period during which the IRS will take into account the extent to which a QDD made a good faith effort to comply with the section 871(m) regulations and the relevant provisions of the 2017 QI agreement. The notice states that the IRS intends to revise the 2017 QI agreement to provide that a QDD will be considered to satisfy the relevant requirements under that agreement for 2017 through 2020 (if there is a good faith effort to comply with the 2017 QI agreement provisions).

Simplified standard

Notice 2018-72 also extends the period during which the simplified standard for combined transactions applies to include 2018. The notice provides that transactions that are entered into in 2017 through 2020 that are combined under the simplified standard will continue to be treated as combined transactions for future years, and will not cease to be treated as such if Reg. section 1.871-15(n) is applied or there is a disposal of less than all of the potential section 871(m) transactions that were combined under this rule.

Transactions that are entered into in 2017 through 2020 that are not combined under the simplified standard will not become combined transactions as a result of applying Reg. section 1.871-15(n) to these transactions in future years—unless a reissuance (or other event) causes the transactions to be re-tested to determine whether they are section 871(m) transactions.

Phase-in relief for QDDs

Notice 2018-72 also extends the phase-in relief for QDDs. Today’s notice states that the IRS and Treasury intend to amend the regulations to provide that a QDD will not be subject to tax on dividends and dividend equivalents received in 2019 and 2020 in its equity derivatives dealer capacity or withholding on dividends (including deemed dividends). Also, with respect to the 2017 QI agreement, a QDD is not required to perform a periodic review with respect to its QDD activities for calendar year 2019 and 2020.

Notice 2018-72 states that taxpayers may rely on this guidance before the amendments to the section 871(m) regulations and the 2017 QI agreement are made and promulgated.

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