8144 Federal Register / Vol. 82, No. 14 / Tuesday, January 24, 2017 / Rules and Regulations

reveal the identity of a source who ACTION: Final regulations and temporary Background provided information under an express regulations. On January 23, 2012, the Federal promise of confidentiality. SUMMARY: This document provides Register published temporary (3) From 5 U.S.C. 552a(d)(2), because regulations (TD 9572) at 77 FR 3108 to require the Commission to amend guidance to nonresident alien individuals and foreign corporations (2012 temporary regulations), and a information thought to be incorrect, notice of proposed rulemaking by cross- irrelevant, or untimely, because of the that hold certain financial products providing for payments that are reference to the temporary regulations nature of the information collected and and notice of public hearing at 77 FR the length of time it is maintained, contingent upon or determined by reference to U.S. source dividend 3202 (2012 proposed regulations, and would create an impossible together with the 2012 temporary administrative and investigative burden payments. This document also provides guidance to withholding agents that are regulations, 2012 section 871(m) by continually forcing the Commission regulations) under section 871(m) of the to resolve questions of accuracy, responsible for withholding U.S. tax with respect to a dividend equivalent, as Code. The 2012 section 871(m) relevance, timeliness, and regulations relate to dividend completeness. well as certain other parties to section 871(m) transactions and their agents. equivalents from sources within the (4) From 5 U.S.C. 552a(e)(1) because: United States paid to nonresident alien DATES: (i) It is not always possible to Effective Date: These regulations individuals and foreign corporations. determine relevance or necessity of are effective on January 19, 2017. Corrections to the 2012 temporary specific information in the early stages Applicability Dates: For dates of regulations were published on February of an investigation. applicability, see §§ 1.871–15(r); 1.871– 6, 2012, and March 8, 2012, in the (ii) Relevance and necessity are 15T(r)(4); 1.1441–1(f)(5); 1.1441–2(f); Federal Register at 77 FR 5700 and 77 matters of judgment and timing in that 1.1441–7(a)(4); 1.1461–1(i). FR 13969, respectively. A correcting what appears relevant and necessary FOR FURTHER INFORMATION CONTACT: D. amendment to the 2012 temporary when collected may be deemed Peter Merkel or Karen Walny at (202) regulations was also published on unnecessary later. Only after 317–6938 (not a toll-free number). August 31, 2012, in the Federal Register information is assessed can its relevance SUPPLEMENTARY INFORMATION: at 77 FR 53141. The Department of the and necessity be established. Treasury (Treasury Department) and the Paperwork Reduction Act (iii) In any investigation the IRS received written comments on the Commission may receive information The collection of information 2012 proposed regulations, and a public concerning violations of law under the contained in these final regulations has hearing was held on April 27, 2012. jurisdiction of another agency. In the been reviewed and approved by the On December 5, 2013, the Federal interest of effective law enforcement Office of Management and Budget in Register published final regulations and and under 25 U.S.C. 2716(b), the accordance with the Paperwork removal of temporary regulations (TD information could be relevant to an Reduction Act of 1995 (44 U.S.C. 9648) at 78 FR 73079 (2013 final investigation by the Commission. 3507(d)) under control numbers 1545– regulations), which finalized a portion (iv) In the interviewing of individuals 0096 and 1545–1597. The collections of of the 2012 section 871(m) regulations. or obtaining evidence in other ways information in these regulations are in On the same date, the Federal Register during an investigation, the Commission § 1.871–15T(p) and are an increase in published a withdrawal of notice of could obtain information that may or the total annual burden in the current proposed rulemaking, a notice of may not appear relevant at any given regulations under §§ 1.1441–1 through proposed rulemaking, and a notice of time; however, the information could be 1.1441–9. This information is required public hearing at 78 FR 73128 (2013 relevant to another investigation by the to establish whether a payment is proposed regulations). In light of Commission. treated as a U.S. source dividend for comments on the 2012 proposed Dated: December 30, 2016. purposes of section 871(m) of the regulations, the 2013 proposed Jonodev Chaudhuri, Internal Revenue Code (Code). This regulations described a new approach Chairman. information will be used for audit and for determining whether a payment Kathryn Isom-Clause, examination purposes. The IRS intends made pursuant to a notional principal that these information collection Vice-Chair. contract (NPC) or an equity-linked requirements will be satisfied by instrument (ELI) is a dividend Sequoyah Simermeyer, persons complying with chapter 3 equivalent based on the delta of the Commissioner. reporting requirements and the contract. In response to written [FR Doc. 2017–00585 Filed 1–23–17; 8:45 am] requirements of the applicable qualified comments on the 2013 proposed BILLING CODE 7565–01–P intermediary (QI) revenue procedure, or regulations, the Treasury Department alternative certification and and the IRS released Notice 2014–14, documentation requirements set out in 2014–13 IRB 881, on March 24, 2014 DEPARTMENT OF THE TREASURY these regulations. An agency may not (see § 601.601(d)(2)(ii)(b)), stating that conduct or sponsor, and a person is not the Treasury Department and the IRS Internal Revenue Service required to respond to, a collection of anticipated limiting the application of information unless it displays a valid the rules with respect to specified ELIs 26 CFR Part 1 control number. described in the 2013 proposed [TD 9815] Books or records relating to a regulations to ELIs issued on or after 90 collection of information must be days after the date of publication of final RIN 1545–BM33 retained as long as their contents may regulations. Dividend Equivalents From Sources become material in the administration On September 18, 2015, the Federal Within the United States of any internal revenue law. Generally, Register published final regulations and tax returns and return information are temporary regulations (TD 9734), at 80 AGENCY: Internal Revenue Service (IRS), confidential, as required by 26 U.S.C. FR 56866, which finalized a portion of Treasury. 6103. the 2013 proposed regulations and

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introduced new temporary regulations under chapter 4 published in the company is the short party in a based on comments received with Federal Register (79 FR 12812). A transaction with a financial institution, respect to the 2013 proposed regulations notice of proposed rulemaking cross- the Treasury Department and the IRS (2015 final regulations and 2015 referencing the 2014 temporary agree that the financial institution is in temporary regulations, respectively, and coordination regulations was published the better position to determine delta together, the 2015 regulations). On the in the Federal Register on March 6, and make other determinations required same date, the Federal Register 2014 (79 FR 12880). On January 6, 2017, by section 871(m). Accordingly, the published a notice of proposed the Treasury Department and IRS definition of the term broker has been rulemaking by cross-reference to published in the Federal Register (82 revised in the temporary regulations so temporary regulations and a notice of FR 2046) final chapters 3 and 61 that it will not apply to a corporation public hearing at 80 FR 56415 (2015 regulations, as well as temporary that would be treated as a broker proposed regulations, and together with regulations (TD 9808). pursuant to section 6045(c) solely the 2015 final regulations, 2015 section This Treasury decision generally because it regularly redeems its own 871(m) regulations). A correcting adopts the 2015 proposed regulations shares. amendment to the 2015 final regulations with the changes discussed in this B. Dividend Equivalents and the 2015 proposed regulations was preamble. This Treasury decision also published on December 7, 2015, in the includes several technical amendments Section 1.871–15(c) provides that, Federal Register at 80 FR 75946 and 80 to the 2015 final regulations in response subject to certain exceptions, a dividend FR 75956, respectively. to comments on those regulations, equivalent includes any payment that The Treasury Department and the IRS which are discussed in this preamble. references the payment of a dividend received written comments on the 2015 Finally, this Treasury decision provides from an underlying security pursuant to proposed regulations, which are new temporary regulations based on a securities lending or sale-repurchase available at www.regulations.gov. The comments received with respect to the transaction, specified NPC, or specified public hearing scheduled for January 15, 2015 proposed regulations. ELI. A dividend is defined in § 1.871– 2016, was cancelled because no request 15(a)(3) as ‘‘a dividend as described in Summary of Comments and to speak was received. section 316.’’ Section 1.871–15(c)(2)(ii) On July 1, 2016, the Treasury Explanation of Provisions reduces a dividend equivalent by any Department and the IRS released Notice I. Technical Corrections to Certain amount treated in accordance with 2016–42, 2016–29 IRB 67 (see Definitions sections 305(b) and (c) as a dividend (a ‘‘section 305(c) dividend’’) with respect § 601.601(d)(2)(ii)(b)) (QI Notice), A. Broker containing a proposed amended to the underlying security referenced by qualified intermediary agreement. The Section 1.871–15(p) generally the section 871(m) transaction. QI Notice included the requirements provides that a broker or dealer is A comment suggested that the and obligations applicable to a QI that responsible for determining whether a regulations clarify how this rule applies acts as a qualified derivatives dealer potential section 871(m) transaction is a when a derivative references an (QDD). The Treasury Department and section 871(m) transaction and for underlying security that has a section the IRS received written comments on reporting to the customer the timing and 305(c) dividend. Another comment Notice 2016–42, which to the extent amount of any dividend equivalent. noted that § 1.871–15(c)(2)(ii) reduces related to section 871(m) and QDDs are Section 1.871–15(a)(1) defines the term the dividend equivalent amount by discussed in the ‘‘Qualified Derivatives broker as ‘‘a broker within the meaning section 305(c) dividends, and that this Dealer’’ section of this preamble. On provided in section 6045(c).’’ Comments reduction arguably applies both to the December 30, 2016, the Treasury explained that many regulated person who holds the underlying Department and the IRS released investment companies satisfy the security giving rise to the section 305(c) Revenue Procedure 2017–15, 2017–3 definition of a broker under section dividend and to a holder of a section IRB 437 (2017 QI Agreement), which 6045(c) and the regulations thereunder 871(m) transaction that references the contains the final QI withholding because the term broker includes a underlying security that gives rise to the agreement and the requirements and corporation that regularly redeems its section 305(c) dividend. obligations applicable to QDDs. own shares. The comments noted that To address these comments, these On December 2, 2016, the Treasury these regulated investment companies final regulations revise the definition of Department and the IRS released Notice may enter into transactions as a short a dividend to explicitly provide that it 2016–76, 2016–51 IRB 834, providing party with a foreign financial institution applies without regard to whether there guidance for complying with the final who is the long party. In these is an actual distribution of cash or and temporary regulations under transactions, the comments asserted, the property. A conforming change is also sections 871(m) and 1441, 1461, and foreign financial institution (not the made to § 1.871–15(c)(2)(ii), which is 1473 in 2017 and 2018 and explaining regulated investment company) is more revised to clarify that only a long party how the IRS intends to administer those capable of determining delta and that is treated as receiving a section regulations in 2017 and 2018. making other calculations. 305(c) dividend is entitled to reduce its On March 6, 2014, temporary The Treasury Department and the IRS dividend equivalent amount and that a regulations (TD 9658) revising certain agree that an entity should not be section 305(c) dividend gives rise to a provisions of the final chapters 3 and 61 treated as a broker for purposes of dividend equivalent. regulations were published in the section 871(m) solely because it Thus, for example, a long party that Federal Register (79 FR 12726), and redeems its own shares. The rules are owns a convertible note that is a section corrections to those temporary intended to assign responsibility for 871(m) transaction and has a section regulations were published in the making the determinations related to 305(c) dividend can reduce its dividend Federal Register (79 FR 37181) on July potential section 871(m) transactions to equivalent by the section 305(c) 1, 2014. Those regulations were issued the party that regularly enters into dividend. In contrast, a long party that to coordinate with certain provisions of equity derivatives with customers or owns a specified NPC that references the 2013 final chapter 4 regulations, as holds equity derivatives on behalf of the same convertible note would receive well as temporary regulations (TD 9657) customers. When a regulated investment a dividend equivalent that includes the

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section 305(c) dividend and would not subject to tax under subchapter L. This For simple contracts, comments be entitled to reduce its dividend comment also recommended that the generally suggested changing the time equivalent by the section 305(c) regulations define the terms ‘‘annuity for calculating delta to the earlier of the dividend on the convertible note contract,’’ ‘‘insurance contract,’’ ‘‘life trade date or the date on which the because the long party does not own the insurance contract,’’ ‘‘endowment parties agreed to the material terms or note, and therefore, is not treated as contract,’’ and ‘‘foreign insurance final pricing for the contract. One receiving a section 305(c) dividend for company’’ based on regulations under comment recommended that the date federal income tax purposes. section 1471. Finally, the comment and time when the material terms are noted that the requirement that a finalized is the appropriate date for C. Simple Contract company be ‘‘predominantly engaged in determining delta because that is the To be a simple contract as defined in an insurance business’’ is unnecessary time when the economic terms of the § 1.871–15(a)(14)(i), the number of in light of the requirement that a potential section 871(m) transactions are shares required to calculate the amounts corporation ‘‘would be subject to tax established. Finally, the parties to the paid or received on any payment under subchapter L if it were a domestic contract are generally bound by the determination date must be corporation’’ because a corporation that terms on the pricing date, not the ascertainable at the time the delta for would be ‘‘subject to tax under settlement date. A comment suggested the transaction is calculated. Several subchapter L if it were a domestic using the trade date if the pricing date comments noted that transactions may corporation’’ necessarily would be is more than 14 days before the issue provide for anti-dilution adjustments to ‘‘predominantly engaged in an date because providing too long a period the number of shares as a result of insurance business.’’ between the pricing and issue date may certain corporate actions, and that these Comments also recommended that the present an opportunity for abuse. adjustments could cause contracts that temporary rule relating to reinsurance For listed options, comments otherwise would be simple contracts should be finalized. Another comment suggested a different method for subject to the delta test to become noted that reinsurance subject to the determining the delta of the contract. complex contracts subject to the more U.S. federal excise tax under section These comments recommend that the complicated substantial equivalence 4371 is not subject to withholding and delta for listed options should be based test. Adjustments that are intended to expressed concern about the interaction on the closing price from the prior maintain the status quo of shareholders of the excise tax and the application of trading day. The comments generally should not preclude a section 871(m) if the reinsurance acknowledged that this approach would transaction from being treated as a exception in the temporary regulations be less accurate than the requirement in simple contract. Accordingly, a sentence was allowed to expire. the final regulations; however, these is added to § 1.871–15(a)(14)(i) to These regulations finalize § 1.871– comments asserted that using the delta provide that an adjustment to the 15T(c)(2)(iv) with one change. The calculation from the prior day for listed number of shares of the underlying Treasury Department and the IRS agree options would substantially reduce the security for a merger, stock split, cash that a company that is taxable under burden on taxpayers and make the rules dividend, or similar corporate action subchapter L as an insurance company more administrable. Comments also that impacts all the holders of the is necessarily predominantly engaged in noted that the Options Clearing underlying security will not prevent the an insurance business. Accordingly, in Corporation currently calculates the transaction from being a simple finalizing § 1.871–15T(c)(2)(iv)(B), the end-of-day delta for options listed on contract. redundant phrase ‘‘predominantly U.S. options exchanges. engaged in an insurance business ’’ is For complex contracts, comments II. Certain Insurance Contracts removed. Although comments suggested recommended that the substantial The exceptions for payments made other modifications to certain terms and equivalence test should be conducted pursuant to annuity, endowment, and the addition of certain defined terms, on the date when the short party’s hedge life insurance contracts were issued as these final regulations do not make is established. According to the a temporary rule in § 1.871–15T(c)(2)(iv) these additional changes. The Treasury comments, the issuer of a complex of the 2015 temporary regulations. Department and the IRS have contract enters into a hedge on the Comments generally agreed with the determined that the scope of entities pricing date, not the settlement date. result in § 1.871–15T(c)(2)(iv)(A) with and contracts described in the The pricing date therefore reflects the respect to insurance contracts issued by temporary regulations as eligible for the economics of a complex contract more domestic insurance companies. Several exception is appropriate for section accurately than the settlement date, as comments requested that § 1.871– 871(m), and that it is beyond the scope long as the two dates are not separated 15T(c)(2)(iv)(A) be issued as a final of these regulations to define terms by too much time. regulation without any change. These relating to insurance. The Treasury Department and the IRS comments noted that any U.S. source agree with the comments that the date dividend that a foreign insurer receives III. Determining Delta and the Initial for determining delta and for performing on U.S. stock it owns with respect to an Hedge the substantial equivalence test should annuity, endowment, or life insurance Section 1.871–15(g)(2) provides that be revised to be more administrable and contract is already subject to the delta of a potential section 871(m) to reflect more accurately the economics withholding tax. transaction is determined only when the of the transactions. Accordingly, these Another comment recommended contract is issued. For this purpose, an regulations provide that the delta of a changes to make the exception for NPC or ELI is issued at the time of the simple contract is determined on the insurance issued by a foreign company contract’s inception, original issuance, earlier of the date that the potential more administrable. That comment or issuance as a result of a deemed section 871(m) transaction is priced and suggested that the regulations be exchange pursuant to section 1001. See the date when the potential section extended to any foreign insurance § 1.871–15(a)(6). The same standard is 871(m) transaction is issued; however, company, without regard to whether the used to determine when a contract is the issue date must be used to company is predominantly engaged in issued for purposes of the substantial determine the delta if the potential the business of insurance and would be equivalence test for complex contracts. section 871(m) transaction is priced

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more than 14 calendar days before it is are not amended, the Treasury notes in which the long party’s return issued. A similar rule also applies to the Department and the IRS note that was determined based on an initially substantial equivalence test. nothing in the regulations prohibits a indeterminate number of shares of the In addition, the regulations provide a taxpayer from obtaining information underlying security. The 2015 section new rule for determining the delta of an from a third party. While taxpayers and 871(m) regulations address this concern option listed on a regulated exchange. withholding agents can use third party by providing an alternative test—the For these options, the delta is data to determine whether a potential ‘‘substantial equivalence test’’—for determined based on the delta of the section 871(m) transaction is a section contracts with indeterminate deltas. For option at the close of business on the 871(m) transaction, taxpayers and purposes of applying this test, the business day before the date of issuance. withholding agents that rely on third- regulations distinguish between simple For this purpose, the regulations define party data remain responsible for the and complex contracts. Generally, a a regulated exchange. A regulated accuracy of that information. simple contract is a contract that exchange is any exchange defined in One comment noted that the issuer of references a single, fixed number of § 1.871–15(l)(3)(vii) or a foreign a structured note (or an affiliate of the shares and has a single maturity or exchange that (A) is regulated by a issuer) may act as a market maker for exercise date. A complex contract is any government agency in the jurisdiction in the structured note, and thus may contract that is not a simple contract. which the exchange is located, (B) purchase the note in its dealer capacity Contracts with indeterminate deltas are maintains certain requirements and then sell the note to the market. classified as complex contracts and are designed to protect investors and to According to the comment, if the subject to the substantial equivalence prevent fraud and manipulation, (C) purchase is treated as a redemption by test. maintains rules to promote active the issuer of the instrument for tax Generally, the substantial equivalence trading of listed options, and (D) had purposes, the subsequent sale to the test measures the change in value of a trades for which the notional value market would be treated as a new issue complex contract when the price of the exceeded $10 billion per day during the for section 871(m) purposes, in which underlying security referenced by that prior calendar year. case the delta for the instrument (or contract is hypothetically increased by The 2015 final regulations provided a substantial equivalence test) would one standard deviation or decreased by simplified delta calculation for certain need to be recomputed at such time. one standard deviation (each, a ‘‘testing simple contracts that reference 10 or The comment suggested that rules price’’) and compares that change to the more underlying securities, provided similar to those in section 108 with change in value of the shares of the that the short party uses an exchange- respect to the purchase of debt underlying security that would be held traded security that references instruments by an issuer acting in a to hedge the complex contract when the substantially all the underlying dealer capacity could apply to equity contract is issued (the ‘‘initial hedge’’) at securities to hedge the NPC or ELI at the derivative structured notes. The each testing price. The smaller the time it is issued (the ‘‘hedge security’’). Treasury Department and the IRS proportionate difference between the The simplified delta calculation allows acknowledge the concern raised by the change in value of the complex contract the short party to calculate the delta of comment. However, the Treasury and the change in value of its initial the NPC or ELI by reference to changes Department and the IRS are concerned hedge at multiple testing prices, the in the value of the hedge security. that an overly broad exception for dealer more equivalence there is between the Comments suggested that this rule be activity may facilitate transactions that contract and the referenced underlying extended to cases in which the short are inconsistent with section 871(m) by security. When this difference is equal party could fully hedge its position by allowing dealers to offer instruments to or less than the difference for a acquiring the exchange-traded security that would be subject to section 871(m) simple contract benchmark with a delta even if it does not in fact hedge in this so long as the instruments were of 0.80 and its initial hedge, the manner. Because the exchange-traded originally issued with a delta below complex contract is treated as security must provide a full hedge of the 0.80. While a dealer that issued such an substantially equivalent to the NPC or ELI for this rule to apply, the instrument holds the instrument in underlying security. When the steps of Treasury Department and the IRS agree inventory, the dealer does not need to the substantial equivalence test cannot that the exchange-traded security will hedge the position with an unrelated be applied to a particular complex provide an acceptable delta calculation party. For this reason, market making contract, a taxpayer must use the whether or not the short party actually activity by the issuer of an instrument principles of the substantial equivalence uses that security as its hedge. (or an affiliate of the issuer) presents test to reasonably determine whether Accordingly, the regulations are different policy concerns from market the complex contract is a section 871(m) amended to permit the delta with making by an unrelated dealer. The transaction with respect to each respect to those NPCs and ELIs to be Treasury Department and the IRS invite underlying security. calculated by determining the ratio of further comments on the appropriate The Treasury Department and the IRS the change in the fair market value of treatment of structured notes and requested comments regarding the the simple contract to a small change in similar instruments that are acquired by substantial equivalence test. In the fair market value of an exchanged- the issuer or an affiliate in its dealer particular, comments were requested on traded security when the exchange- capacity. whether two testing points were traded security would fully hedge the adequate to ensure that the test would NPC or ELI. IV. Substantial Equivalence Test capture appropriate transactions and on Some comments noted that third- Comments to the 2013 proposed the administrability of the test. party data, including delta calculations, regulations generally agreed that the Comments also were requested on the may be available for certain potential delta test was fair and practical for the application of the test to complex section 871(m) transactions. These majority of equity-linked derivatives. contracts that reference multiple comments requested that the final However, comments explained that the securities, including path-dependent regulations be amended to explicitly delta test would be impractical or instruments (that is, an instrument for permit withholding agents to rely on impossible to apply to more exotic which the final value depends, in whole this data. Although the final regulations equity derivatives, such as structured or in part, on the price sequence (or

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path) of the underlying security before time the substantial equivalence test is because the tax is withheld at a later the maturity of the instrument). applied to the complex contract, has a date. Section 1.871–15(j)(2) establishes Comments generally did not delta of 0.8, references the applicable the time for determining the amount of recommend material changes to the test. underlying security referenced by the a dividend equivalent; the amount of As a result, these final regulations adopt complex contract, and has terms that are the long party’s tax liability should not the substantial equivalence test as consistent with all the material terms of change because the withholding agent proposed in the 2015 proposed the complex contract, including the does not withhold at the time the tax regulations with minor changes as maturity date. In addition, to further liability arises. Therefore, changes in described in this section. ensure comparability between the facts (such as the tax rate or whether the One comment noted that the simple contract benchmark and the recipient is a qualified resident of a substantial equivalence test might be complex contract, the final regulations country with which the U.S. has an unduly burdensome in certain cases, provide that the simple contract income tax treaty) between the time that such as when it is obvious that a benchmark must consistently apply the amount of a dividend equivalent is particular instrument would satisfy the reasonable inputs, including a determined and the time that test and application of the test would reasonable time period for the contract. withholding occurs, do not affect tax have no effect on the amount of For example, the reasonable time period liability. For example, if at the time for withholding. This comment suggested for the contract must be consistently determining the dividend equivalent that an issuer of a complex contract be applied in determining the standard amount, the long party qualifies for a allowed to use an alternative test to deviation and probability, as well as the treaty, but in the year the amount is determine the withholding tax imposed maturity date and any other terms withheld the long party does not, the with respect to a dividend equivalent as dependent on that time period. dividend equivalent would qualify for long as the alternative test resulted in treaty benefits. the same amount of withholding tax as V. Amount and Timing of a Taxpayer’s Finally, § 1.871–15(j)(1) expressly would have been the case if the issuer Liability provides that the long party is only had used the substantial equivalence Section 1.871–15(j) contains rules for liable for tax on dividend equivalents test. These final regulations do not determining the amount of the dividend that arise while the long party is a party adopt this comment. Even in those cases equivalent. In addition, § 1.871–15(j) to the transaction. For example, if long where the result for a potential section requires that the amount of a dividend party A, a foreign person, enters into a 871(m) transaction is intuitive, equivalent be determined on the earlier section 871(m) transaction on an administration of such an alternative of the record date of the dividend and underlying stock that pays quarterly approach would generally require the day before the ex-dividend date with dividends, and sells the transaction to applying the substantial equivalence respect to the dividend. In many cases, B, a foreign person, after four dividends test to demonstrate that the alternative the amount of a dividend equivalent on the underlying stock have been paid, test results in the same amount of will be determined before a withholding A will be subject to tax on those four withholding tax as the substantial agent will be required to withhold any dividend equivalents and B will be equivalence test. As issuers of complex tax pursuant to newly redesignated subject to tax on subsequent dividend contracts become proficient with the § 1.1441–2(e)(7) (formerly § 1.1441– equivalents as long as B holds the substantial equivalence test it is 2(e)(8)). Comments requested that a section 871(m) transaction. expected that it will be relatively foreign holder’s tax liability be deferred Alternatively, if A is a U.S. person, B straightforward to determine whether a until withholding is required, in order would still only be subject to tax on the particular instrument is subject to to avoid the need for the foreign holder dividend equivalents after it acquires withholding under section 871(m). to file a return and pay tax. The the transaction. Another comment suggested that the comments noted that this approach Treasury Department and the IRS would be consistent with the general VI. Qualified Index consider whether the substantial withholding regime under chapter 3 of Section 1.871–15(l) provides a safe equivalence test could be manipulated the Code. With respect to a section harbor for derivatives based on certain to allow taxpayers to understate the 871(m) transaction acquired by a foreign qualified indices. Section 1.871–15(l)(1) similarity of a complex contract to the investor after its initial issuance, a provides that the purpose of the underlying security. This comment comment requested clarification that the exception for qualified indices is to suggested that more guidance should be foreign investor is only liable for provide a safe harbor for potential offered about the criteria for dividends determined on the underlying section 871(m) transactions that determining whether a simple contract security during the period that the reference certain passive indices, and is ‘‘closely comparable’’ to a complex foreign investor is the beneficial owner that an index is not a qualified index if contract for purposes of choosing a of the section 871(m) transaction. treating the index as a qualified index simple contract benchmark. The same These regulations include several new would be contrary to this purpose. comment recommended that the provisions in response to these Section 1.871–15(l)(4) provides a regulations specify that the benchmark comments. First, § 1.871–15(j)(4) is specific safe harbor for derivatives based contract could be a hypothetical added to provide that a long party on an index in which the U.S. stock instrument, and that the material terms, generally is liable for tax on a dividend components comprise, in the aggregate, including the treatment of dividends, equivalent in the year the dividend 10 percent or less of the weighting of all should be consistent with the terms of equivalent payment is subject to the component securities in the index. the complex contract (aside from the withholding pursuant to § 1.1441– A comment regarding the 10 percent terms that make the contract complex 2(e)(7), or in the case of a QDD, when safe harbor indicated that some and that make the delta of the closely the payment of the applicable dividend taxpayers, notwithstanding the purpose comparable benchmark 0.8). on the underlying security is subject to test for indices in § 1.871–15(l)(1), may In response to this comment, the final withholding. seek to use a customized index to make regulations provide that the simple Second, the regulations are amended tax-advantaged investments in specific contract benchmark may be an actual or to clarify that the amount of a dividend U.S. stocks. Although the index hypothetical simple contract that, at the equivalent subject to tax will not change described by the comment may not be

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a qualified index as a result of the within two days of each other. To contracts. This comment recommended purpose rule in § 1.871–15(l)(1), the replace the presumptions, comments that the final regulation be amended if final regulations are revised to clarify recommended that a withholding agent the Treasury Department and the IRS that, in order to meet this 10 percent only be required to combine contracts if disagreed with this reading of the safe harbor, an index must be widely the withholding agent had actual combination rule. The Treasury traded and must not be formed or knowledge that two contracts were Department and the IRS agree that availed of with a principal purpose of priced, marketed, or sold in connection transactions will only be combined into tax avoidance. with each other. simple transactions pursuant to § 1.871– Comments to the qualified indices The Treasury Department and the IRS 15(n); therefore, the final regulations are rules in the 2015 final regulations also disagree that the priced, marketed, or not amended. requested that the Treasury Department sold standard should replace the Other comments suggested some and the IRS address how the rules apply combination presumptions. Comments clarifications to the combination rules to to an index in the first year it is created. noted a ‘‘not uncommon’’ example of an resolve ambiguities. For example, Accordingly, these final regulations add active foreign investor who acquires or comments requested, among other § 1.871–15(l)(2)(ii) to provide that, for sells within a two-day period hundreds things, that (1) ordering rules provide the first year, an index is tested on the of listed options referencing the same that a contract cannot be combined first business day it is listed, and the underlying security. The Treasury more than once and (2) no combination dividend yield calculation is Department and the IRS, however, transaction should have a delta of more determined using the dividend yield intended to treat those transactions as than one. The final regulations are not that the index would have had in the combined to the extent that the amended to address these issues immediately preceding year if it had the potential section 871(m) transactions are because the final regulations are same components throughout that year entered into in connection with each intended to provide a general that it has on the day it is created. other and satisfy the other requirements framework for determining when two or of § 1.871–15(n)(1). The priced, more transactions should be combined. VII. Combined Transactions marketed, or sold standard provides an The comments received to date show For purposes of determining whether inadequate substitute for the combined that industry understanding of how the transactions are section 871(m) transaction test and the presumptions combination rules may be administered transactions, the 2015 final regulations because investors can replicate a section continues to develop as financial treat two or more transactions as a 871(m) transaction by entering into institutions work to establish systems. single transaction when a long party (or multiple potential section 871(m) As this understanding evolves, the a related person) enters into multiple transactions. For example, an investor Treasury Department and the IRS may transactions that reference the same could replicate a delta one transaction publish subsequent guidance to address underlying security, the combined by entering into a put option and a call the issues raised by these comments. potential section 871(m) transactions option on the same underlying security Until such further guidance is issued, replicate the economics of a transaction at the same time, with the same strike taxpayers may adopt any reasonable that would be a section 871(m) price, whether or not the options are methodology to combine transactions transaction, and the transactions were priced, marketed, or sold together. For within the general framework of the entered into in connection with each this reason, the priced, marketed, or final regulations. other. The 2015 final regulations also sold standard provides an inadequate VIII. Party Responsible for Determining provide brokers acting as short parties substitute for the presumptions. The Delta and Other Information with two presumptions that may be comments submitted with respect to the applied to determine whether to combination rule acknowledge short The 2015 final regulations provide combine potential section 871(m) parties and withholding agents are that when one of the parties to a transactions. First, a broker may aware that foreign investors use potential section 871(m) transaction is a presume that transactions are not multiple transactions in a manner that broker or dealer, that broker or dealer is entered into in connection with each are combined under the final responsible for determining whether the other if the long party holds the regulations. The ‘‘priced, marketed, or transaction is a section 871(m) transactions in separate accounts. sold’’ standard would undermine the transaction. When both parties to a Second, a broker may presume that enforcement of the combination rules. potential section 871(m) transaction are transactions entered into two or more Notwithstanding the prior paragraph, a broker or dealer or neither party to a business days apart are not entered into Notice 2016–76 provides a simplified potential section 871(m) is a broker or in connection with each other. A broker, standard for withholding agents to dealer, the short party to the transaction however, cannot rely on the first determine whether transactions entered must determine whether the transaction presumption if it has actual knowledge into in 2017 are combined transactions. is a section 871(m) transaction. that the long party created or used A withholding agent will only be Comments noted that multiple parties separate accounts to avoid section required to combine transactions could be responsible for determining 871(m). In addition, neither entered into in 2017 for purposes of whether a transaction is a section presumption applies if the broker has determining whether the transactions 871(m) transaction because the actual knowledge that transactions were are section 871(m) transactions when definition of a ‘‘party to the transaction’’ entered into in connection with each the transactions are over-the-counter includes a long party, a short party, any other. Section 1.1441–1(b)(4)(xxiii) also transactions that are priced, marketed, agent acting on behalf of a long party or permits withholding agents to rely on or sold in connection with each other. short party, and any person acting as an these presumptions. Withholding agents will not be required intermediary with respect to a potential Comments suggested several changes to combine any transactions that are section 871(m) transaction. Comments to the combined transaction rules. listed securities that are entered into in noted that both a short party and one or Comments noted that it will be 2017. more agents of the short party may be burdensome to identify every contract Another comment noted that the final a broker or dealer; in this case, the 2015 that a customer entered into with regulations indicated that transactions final regulations do not identify which respect to the same underlying security would only be combined into simple of the responsible parties has the

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primary obligation to determine acting on behalf of the short party are responsible party for structured notes whether the transaction is a section a broker or dealer. In these (including contingent payment debt 871(m) transaction. circumstances, the Treasury Department instruments), warrants, convertible Comments requested that the and the IRS have determined that the stocks, and convertible debt regulations clarify which broker has the short party should be the responsible instruments. Because the issuer of these obligation to determine whether a listed party because it will have access to the ELIs ordinarily will have structured the option is a section 871(m) transaction relevant data regarding that transaction, ELI, determined the pricing of the ELI, when multiple brokers or dealers are whereas an agent or intermediary may and hedged the ELI, the issuer involved. One comment recommended not have the necessary information. As ordinarily will be in the best position to that the long party’s broker that has the responsible party, the short party act as the responsible party. While the custody of the transaction at the end of may contract with a third party to make issuer of an ELI may not be a broker or the day would be best suited to act as the determinations on its behalf; dealer, an issuer of an ELI typically is the responsible party. Comments also however, the short party remains advised by a broker or dealer. noted that the short party or the agent responsible for the accuracy of any of a short party may not have the calculations by the third party. IX. Qualified Derivatives Dealer relevant information necessary to In addition, if the short party is not a Section 1.871–15T(q) permits a QDD determine when withholding should broker or dealer, but more than one to reduce its liability under section 871 take place. For example, when a long agent or intermediary acting on behalf of or 881 for a dividend or dividend party has sold an instrument in the the short party is a broker or dealer, equivalent to the extent it makes an secondary market, the short party and § 1.871–15T(p)(1)(ii) provides that the offsetting dividend equivalent payment its agent may not have any knowledge broker or dealer closest to the short in its dealer capacity. Only an eligible of that sale. As a result, the long party’s party in the payment chain is the entity that has entered into a QI broker should be the responsible party. responsible party. The Treasury agreement can be a QDD. An eligible Other comments indicated that the Department and the IRS have entity is defined as: (1) A dealer in issuer should be the responsible party determined that the agent or securities subject to regulatory when the issuer itself is a broker or a intermediary closest in the chain to the supervision as a dealer, (2) a bank dealer, or when the issuer has an short party will have the best access to subject to regulatory supervision as a affiliate that is a broker or dealer. In any information the short party has that bank, or (3) a wholly-owned entity of a these cases, the issuer or its affiliate is is necessary to determine whether a bank subject to regulatory supervision likely to have the information necessary potential section 871(m) transaction is a as a bank when the wholly-owned entity to determine whether the transaction is section 871(m) transaction and to make (a) issues potential section 871(m) a section 871(m) transaction. As noted other relevant determinations. in other comments, an intermediary to Section 1.871–15T(p)(1)(ii) also transactions to customers and (b) a transaction issued by a broker or generally provides that when one or receives dividends or dividend dealer, such as a clearinghouse, will not more agents or intermediaries acting on equivalent payments from stock or have the information necessary to behalf of the long party are brokers or potential section 871(m) transactions determine whether a potential section dealers, the agent or intermediary that is that hedge the potential section 871(m) 871(m) transaction is a section 871(m) closest to the long party in the payment transactions issued to customers. transaction, and is unlikely to know chain is the responsible party when § 1.1441–1T(e)(6). An entity is only a either the time or the amount to neither the short party nor any agent or QDD when acting in its QDD capacity. withhold. intermediary acting on behalf of the A. Income Tax Treaties The Treasury Department and the IRS short party is a broker or dealer. In this agree that the final regulations may situation, the temporary regulations In general, section 871(m) and the result in multiple parties to a place the responsibility with the agent regulations thereunder apply to a transaction qualifying as the party or intermediary closest to the long party dividend equivalent payment without responsible for determining whether a because this agent or intermediary will regard to whether the payor of the potential section 871(m) transaction is a know whether or not the long party is dividend equivalent payment is section 871(m) transaction. New subject to tax under section 871 or 881 domestic or foreign. Section 1.894– temporary regulations resolve this and when the long party has terminated 1(c)(2) provides that ‘‘[t]he provisions of duplication of responsible parties under or otherwise disposed of the transaction. an income tax convention relating to § 1.871–15(p)(1) in the following Similarly, these temporary regulations dividends paid to or derived by a circumstances: (1) Both the short party also provide a rule for determining the foreign person apply to the payment of and an agent or intermediary of the responsible party when potential a dividend equivalent described in short party are a broker or a dealer; (2) section 871(m) transactions are traded section 871(m) and the regulations the short party is not a broker or dealer on an exchange and cleared by a thereunder.’’ Consistent with the and more than one of the agents or clearing organization. When more than foregoing, the 2017 QI Agreement intermediaries of the short party is a one broker or dealer acts as an agent or provides that a QDD must treat any broker or dealer; (3) the short party and intermediary between the short party dividend equivalent as a dividend from its agents or intermediaries are not and a foreign investor on an exchange- sources within the United States for brokers or dealers, and more than one traded contract, the broker or dealer that purposes of section 881 and chapters 3 agent or intermediary acting on behalf of has an ongoing customer relationship and 4 consistent section 871(m) and the the long party is a broker or dealer; and with the foreign investor is the regulations thereunder. The 2017 QI (4) potential section 871(m) transactions responsible party. Generally, this Agreement provides that a QDD may are traded on an exchange and cleared intermediary will be the clearing firm. reduce the rate of withholding under by a clearing organization. Finally, these temporary regulations chapter 3 based only on a beneficial Specifically, § 1.871–15T(p)(1)(ii) provide that the issuer of a potential owner’s claim that it is entitled to a provides that the short party is the section 871(m) transaction will be the reduced rate of withholding for portfolio responsible party when both the short responsible party for certain ELIs. dividends under the dividends article of party and an agent or intermediary Specifically, the issuer is the an applicable income tax treaty.

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B. Eligible Entities capacity, (1) issues potential section the QDD is contractually obligated to Comments requested that the 871(m) transactions to customers, and make on the same underlying security is Treasury Department and the IRS (2) receives dividends with respect to less than the dividend and dividend expand the scope of entities that qualify stock or dividend equivalent payments equivalent amount the QDD received, as an eligible entity under § 1.1441–1(e), pursuant to potential section 871(m) the QDD would be liable for tax under and therefore can act as a QDD under a transactions that hedge potential section section 871(a) or 881 for the difference. The QI Notice described proposed QI agreement. One comment requested 871(m) transactions that it issues. These final regulations do not expand changes to the QI agreement that would that the eligibility criteria be expanded the eligible entity definition to implement the QDD tax liability to permit a controlled foreign specifically include CFCs. The described in § 1.871–15T(q). Under the corporation (CFC) of a U.S financial comments generally did not adequately QI Notice, a QDD’s section 871(m) institution to act as a QDD even if the explain why CFCs cannot avail amount for a dividend was the excess of CFC is not a QI. Other comments themselves of the QI regime (with the the dividends on underlying securities recommended that the definition of an QDD provisions). Permitting CFCs that associated with potential section 871(m) eligible entity be expanded to include a are not QIs to be QDDs would eliminate transactions and dividend equivalent bank holding company if the entity the compliance benefits provided in the payments that it received that reference regularly issues potential section 871(m) 2017 QI Agreement and would make it the same dividend over dividend transactions to customers and receives more difficult for the IRS to verify equivalent payments and any qualifying dividends or dividend equivalent compliance with the QDD rules. dividend equivalent offsetting payment payments pursuant to potential section However, to provide the IRS with that the QDD made or was contractually 871(m) transactions to hedge the flexibility to administer the QDD obligated to make with respect to the transactions issued to customers. regime, an eligible entity is defined to same dividend. The QI Notice described Comments noted that a bank holding include any other person acceptable to a qualifying dividend equivalent company is subject to a wide range of the IRS, which is similar to the offsetting payment as (a) any payment regulatory regimes. allowance provided to the IRS in made or contractually obligated to be Comments also recommended that the defining persons eligible to enter into a made to a United States person that scope of eligible entities be expanded to QI agreement as provided in § 1.1441– would be a dividend equivalent include subsidiaries of securities dealers 1(e)(5)(ii)(D). payment if made to a person who was and bank holding companies that A comment also raised a technical not a United States person and (b) any regularly issue potential section 871(m) issue with who can qualify as a QI, payment made to a foreign person that transactions to customers and receive expressing concern that some eligible would be a dividend equivalent dividends or dividend equivalent entities that are not foreign financial payment if the payment were not treated amounts with respect to hedges of those institutions may not be able to enter into as income effectively connected with customer transactions. Comments noted QI agreements because they are not the conduct of a U.S. trade or business. that these entities are part of a regulated eligible to become a QI. The 2017 QI In addition, the QI Notice proposed financial group. Agreement and these final regulations rules regarding how a QDD would In response to comments, the 2017 QI now clarify that an eligible entity calculate its QDD tax liability. Agreement announced the expansion of (notwithstanding that the entity Specifically, under the QI Notice, the the definition of eligible entities to otherwise would not be eligible to be a QDD tax liability was the sum of a include a bank holding company and QI) can enter into a QI agreement in QDD’s liability under sections 871(a) subsidiaries of a bank holding company. order to implement the QDD provisions. and 881 for (a) its section 871(m) The Treasury Department and the IRS amount; (b) its dividends that are not on C. Section 871(m) Amount and QDD’s agree that a bank holding company and underlying securities associated with Tax Liability subsidiaries of a bank holding company potential section 871(m) transactions should be included in the definition of Section 1.871–15T(q)(1) of the 2015 and its dividend equivalent payments an eligible entity because these entities temporary regulations provided that a received as a QDD in its non-dealer are regulated financial institutions. QDD generally would not be liable for capacity; and (c) any other payments, The 2017 QI Agreement clarified that tax under section 871 or 881 on a such as interest, received as a QDD with the eligible entity test is applied at the dividend or dividend equivalent respect to potential section 871(m) home office or branch level, and that payment that the QDD receives in its transactions or underlying securities each home office or branch is a separate capacity as a QDD, provided that the that are not dividend or dividend QDD. The 2017 QI Agreement also QDD complies with its obligations equivalent payments. expanded what constitutes an eligible under the qualified intermediary Comments requested that a QDD be entity to include a foreign branch of a agreement. Section 1.1441–1T(e)(6) of permitted to elect to calculate its section U.S. financial institution that would the 2015 temporary regulations 871(m) amount either by using (1) the meet the requirements of an eligible provided that a QDD would not be method described in the QI Notice or (2) entity if the branch were a separate subject to withholding on such its net delta exposure to an underlying entity, though such a branch will not be dividends or dividend equivalents. security. According to comments, the subject to tax on its QDD tax liability Section D of this Part IX describes net delta exposure is a calculation, because it is otherwise subject to tax on certain changes to the foregoing rules measured in shares of stock, that a net income basis under chapter 1. that the Treasury Department and the aggregates all the shares of an Both of these changes are incorporated IRS determined are appropriate in light underlying security and all equity in these final regulations. These final of the adoption of the net delta derivative transactions referring to the regulations also clarify that a subsidiary approach described in this Part IX.C. same underlying security that the QDD of a bank or bank holding company Section 1.871–15T(q)(1) of the 2015 has entered into in a dealer capacity could be indirectly wholly-owned by temporary regulations further provides (whether customer transactions or the qualifying bank or bank holding that, if a QDD receives a dividend or hedging transactions). Comments company provided that the subsidiary, dividend equivalent payment and the explained that net delta accurately acting in its equity derivatives dealer offsetting dividend equivalent payment measures a QDD’s residual exposure to

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an underlying security. Comments the determination of the section 871(m) deemed dividends received by a QDD in noted that financial institutions use net amount discussed in this section and its QDD capacity in 2017 will not be delta exposure for business and non-tax the changes to withholding on payments subject to tax under section 881(a)(1) or regulatory purposes. to a QDD that are discussed in the subject to withholding under chapters 3 Comments also requested that the following section of this preamble. and 4. A QDD will be subject to Treasury Department and the IRS Specifically, a QDD’s tax liability on its withholding on dividends (including expand the offsetting dividend section 871(m) amount is, for each deemed dividends) received on or after equivalent payment to include all dividend on each underlying security, January 1, 2018. customer transactions, such as potential the amount by which its tax liability The Treasury Department and the IRS section 871(m) transactions with a delta under section 881 for its section 871(m) will consider comments recommending below 0.8, grandfathered transactions, amount exceeds the amount of tax paid approaches for alleviating any and transactions that reference a by the QDD under section 881 overwithholding (and preventing any qualified index. (including amounts withheld on underwithholding) that might occur on In response to comments relating to payments to the QDD) on dividend dealer transactions with customers and the QI Notice, Notice 2016–76 payments received by the QDD in its on positions that hedge customer announced that the regulations would capacity as an equity derivatives dealer. transactions when withholding on be revised to require a QDD to calculate The QDD also is liable for tax under dividends (including deemed its section 871(m) amount based on the section 881 for dividend equivalent dividends) paid to QDDs resumes in net delta approach. The Treasury payments received by a QDD in its non- 2018. Department and the IRS agree that the equity derivatives dealer capacity and The QI Notice provided that a net delta approach provides an for any other payments (including withholding agent (other than a administrable and accurate method for a dividends) it receives as a QDD to the withholding agent that itself was acting QDD to determine its residual exposure extent the full liability was not satisfied as a QDD) would not be required to to underlying securities. The Treasury by withholding. withhold or report on payments made to Department and the IRS, however, do a QDD with respect to potential section not agree with comments indicating that D. Withholding on Dividends Paid to a 871(m) transactions and underlying QDDs should be permitted to elect to QDD securities, other than reporting for use the net delta exposure method or In general, under the law in effect dividends and substitute dividends. A the rule described in the QI Notice. It prior to 2017, an eligible entity that comment requested that a withholding would be burdensome to the IRS to would qualify as a QDD under these agent should only be exempt from administer a system that permits a QDD final regulations generally was subject withholding and reporting on dividends to use multiple methods to calculate its to tax under section 881 and to and dividend equivalents paid to a section 871(m) amount. The Treasury withholding tax under chapters 3 and 4 QDD. In response to this comment, the Department and the IRS, however, will on actual dividends in the same manner 2017 QI Agreement provides that all consider comments that explain in more as any other foreign recipient. As payments (other than dividend detail why a choice of methods for described in the preceding section, the equivalent payments) made to a QDD determining the section 871(m) amount 2015 temporary regulations provided with respect to underlying securities is in the best interests of both taxpayers that a QDD would no longer be subject will be subject to withholding and and the government. to tax or to withholding on actual reporting if the payments would be These final regulations further explain dividends received in its capacity as a subject to withholding and reporting to how a QDD’s section 871(m) amount is QDD. The Treasury Department and the a non-QDD. Consistent with the 2017 QI computed. The amount is determined IRS are concerned that this exemption Agreement, the final regulations provide separately for each dividend on an in the 2015 temporary regulations, when that all payments (other than dividend underlying security. For example, if a combined with the net delta exposure equivalent payments) made to a QDD QDD enters into section 871(m) method, could result in U.S. source with respect to underlying securities transactions that reference stock A dividends escaping U.S. tax completely will be subject to withholding and (which pays a $5 dividend per share), in certain circumstances. For example, reporting if those payments would be hedges the transactions by acquiring if a QDD holds physical shares of an subject to withholding and reporting actual shares of stock, and has a net underlying security that it uses to hedge when received by a foreign person. delta exposure to one share of stock, the a delta 0.5 option, both the dividend QDD will have a tax liability pursuant and the option would not be subject to E. Dealer Versus Proprietary Capacity to sections 871(a) and 881 with respect tax under section 871 or section 881. In The 2015 temporary regulations only to a $5 dividend based on its net delta response to this concern, Notice 2016– permitted a taxpayer to act as a QDD exposure to one share of stock A. 76 announced that the Treasury with respect to certain payments Amounts with respect to other Department and the IRS intended to received in its dealer capacity. dividends on the same stock or another revise §§ 1.871–15T(q)(1) and 1.1441– Comments requested that a taxpayer be stock are not taken into account. 1(b)(4)(xxii) to provide that a QDD will permitted to act as a QDD for payments Because these final regulations adopt remain liable for tax under section received in its proprietary capacity for the net delta exposure method for 881(a)(1) and subject to withholding administrative reasons. The QI Notice calculating the section 871(m) amount, under chapters 3 and 4 on dividends on and the 2017 QI Agreement reflect this the concepts of offsetting dividend physical shares and deemed dividends change to the scope of QDD payments. equivalent payments and qualifying received. These final regulations revise The change in QDD scope does not dividend equivalent offsetting payments §§ 1.871–15T(q)(1) and 1.1441– impact the limitation on amounts have been eliminated from these final 1(b)(4)(xxii) accordingly. However, as entitled to be offset, which remain regulations. announced in the 2017 QI Agreement, limited to dealer activity. These final regulations revise the in order to allow taxpayers time to Consistent with the 2015 regulations, calculation of a QDD’s tax liability on implement the net delta approach, these the QI Notice and the 2017 QI the section 871(m) amount to regulations continue to provide that Agreement provide that, for purposes of correspond with the changes regarding dividends on physical shares and determining the QDD tax liability,

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payments received by a QDD acting as the time that a QDD withholds on appropriate to permit credits or offsets a proprietary trader are treated as customer transactions should match the for any entity that does not qualify as an payments received in its non-dealer time period for which it determines its eligible entity. In reaching this capacity, while transactions properly own tax liability with respect to the conclusion, the Treasury Department reflected in a QDD’s dealer book are section 871(m) amount. This is because and the IRS agree with the comment presumed to be held by a dealer in its the withholding tax that may apply to that indicated that the QDD rules dealer capacity. For purposes of customer transactions is the justification provide a more administrable method of determining the QDD tax liability, for relieving the QDD from tax on its determining that withholding properly dealer activity is limited to its activity section 871(m) amount. In addition, this occurred. If the entity is acting as an as an equity derivatives dealer. One rule simplifies the reconciliation intermediary instead of acting as a comment requested that the regulations statement, makes it easier for reviewers principal, it may choose to be a QI that clarify and qualify the distinction and the IRS to verify that a QDD has is not a QDD. The second comment did between receiving a payment in a dealer complied with the requirements of the not explain why the existing QDD versus in a proprietary trader capacity 2017 QI Agreement, and avoids a regime is insufficient. and the impact of the distinction on the number of other issues that would arise In addition to comments regarding the ability of an entity to act as a QDD. The under the requested approach, credit forward system, a comment Treasury Department and the IRS have including statute of limitation issues. requested that QSL status be preserved determined that the regulations With respect to the concerns expressed as a standalone rule for securities adequately delineate between dealer regarding the need to build systems, the lending transactions that are part of a and proprietary transactions in § 1.871– Treasury Department and the IRS note separate line of business from other 15(q)(2). that this timing rule is consistent with potential section 871(m) transactions. the rule that was proposed in the QI Another comment recommended F. Timing of Withholding Notice, released July 1, 2016. Moreover, reverting to the eligibility requirements Generally, newly redesignated as described in Notice 2016–76, during for a QSL in the QSL Notice by § 1.1441–2(e)(7) (formerly § 1.1441– 2017, the IRS will take into account the extending QDD status to custodian QIs 2(e)(8)) provides that a withholding extent to which a QDD has made a good that are subject to regulatory agent must withhold on a dividend faith effort to comply with the QDD supervision by a governmental authority equivalent on the later of the date on provisions in the QI agreement when in the jurisdiction in which the entity which the amount of the dividend enforcing those provisions. was created, as long as the entity agrees equivalent is determined and the date to assume primary withholding and that a payment occurs. A payment G. Qualified Securities Lenders (QSL) reporting responsibility with respect to generally occurs when money or other and Credit Forward dividend equivalent payments and property is paid to or by the long party, Notice 2010–46, 2010–24 I.R.B. 757 complies with all QDD certification or the long party sells, exchanges, (see § 601.601(d)(2)(ii)(b)), (QSL Notice) requirements. transfers, or otherwise disposes of a outlined a proposed credit forward While the Treasury Department and section 871(m) transaction. system that allowed a withholding agent the IRS understand that the QSL regime Notwithstanding this general rule to limit the aggregate U.S. gross-basis was administratively more convenient applicable to withholding agents, the QI tax in a series of securities lending for taxpayers than the QI regime, it Notice announced that a QDD must transactions to the amount of U.S. gross- created administrability problems, withhold with respect to a dividend basis tax applicable to the foreign particularly with respect to verification, equivalent payment on the dividend taxpayer receiving a substitute or actual for the IRS. That regime is being payment date for the applicable dividend in the series of transactions replaced by incorporating the QDD rules dividend on the underlying security as who bears the highest rate of U.S. gross- into the existing QI framework, determined in § 1.1441–2(e)(4). basis tax. The preamble to the 2015 including the specific rules for pooled Comments noted that this change regulations indicated that the credit reporting on Form 1042–S, and the QI would require a QDD to pay tax prior to forward system remained under requirements for compliance review and the date that other withholding agents consideration, but noted that, during the certification. With respect to banks, would have been required to withhold. transition period provided in Notice custodians, and clearing organizations In addition, comments expressed 2010–46, the IRS has experienced that do not issue potential section concern that this rule would result in difficulty verifying that prior 871(m) transactions to customers, the cashless withholding for many withholding has occurred. Comments Treasury Department and the IRS are transactions. Comments also noted that were requested on the need for the concerned that reverting to the withholding agents have been building regime and how it could be eligibility requirements for a QSL in the withholding systems according to the implemented. QSL Notice would permit an entity to general rule provided in the final Comments requested that the credit act as a QDD that does not act as a section 871(m) regulations. Comments forward system be retained. One financial intermediary in a chain of recommended that the final section comment requested that the credit section 871(m) transactions. 871(m) regulations be amended to forward system be retained when QDD As part of the transition relief permit a QDD to elect to withhold on status was not available. In contrast, announced in Notice 2016–76, the the payment of the dividend equivalent another comment suggested that the Treasury Department and the IRS as provided in newly redesignated stringency resulting from tightening the announced that taxpayers may continue § 1.1441–2(e)(7) or on the dividend eligibility requirements for QDDs to QIs to rely on the QSL Notice during 2017. payment date as determined in that are subject to reporting and The QSL Notice will be obsoleted as of § 1.1441–2(e)(4). compliance requirements would January 1, 2018. The Treasury Department and the IRS improve the ability to verify that prior have determined that a QDD should withholding occurred. X. Rules for Withholding on Dividend continue to be required to withhold on As discussed in Part IX.B of this Equivalents the dividend payment date as preamble the Treasury Department and Newly designated § 1.1441–2(e)(7) determined in § 1.1441–2(e)(4), because the IRS have concluded that it is not provides that a withholding agent is not

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obligated to withhold on a dividend B. Option To Withhold on Dividend choose to withhold on NPCs under the equivalent until the later of when a Payment Date rule in § 1.1441–2(e)(7). When a payment is made with respect to a While § 1.1441–2(e)(7) generally withholding agent withholds on the section 871(m) transaction and when defers withholding on a section 871(m) dividend payment date under this the amount of a dividend equivalent is transaction until there is a payment alternate method, the withholding agent determined. For purposes of § 1.1441– made pursuant to the transaction, must notify each payee in writing before 2(e)(7), a payment with respect to a comments noted that § 1.1441–2(e)(7) the time for determining the long party’s section 871(m) transaction occurs when will require cashless withholding in first dividend equivalent payment. A the long party receives or makes a certain circumstances. To implement withholding agent that withholds on the payment, when there is a final the 2015 final regulations, comments dividend payment date for the settlement of the section 871(m) noted that market participants would be underlying security also must attach a statement to its Form 1042 for the year transaction, or when the long party sells required to develop or amend collateral of the change notifying the IRS of the or otherwise disposes of the section and indemnity arrangements with change and when it applies. 871(m) transaction. The 2015 final customers. Some comments regulations adopted this approach in recommended amending the 2015 final XI. Applicability Date response to taxpayer comments. regulations to allow withholding agents The current regulations provide that to treat a dividend equivalent as paid § 1.871–15(d)(2) and (e) apply to any A. Transactions Transferred to a and subject to withholding on the Different Account payment made on or after January 1, dividend payment date for the 2017, with respect to any transaction underlying security referenced by the The 2015 final regulations provide issued on or after January 1, 2017. section 871(m) transaction. Comments that a payment occurs when the long Several comments requested that indicated that some withholding agents party sells or disposes of a section implementation of these provisions be believe that it will be easier to 871(m) transaction; however, when a delayed until at least January 1, 2018. implement withholding on the dividend One comment requested that long party transfers a section 871(m) payment date for the underlying transaction from one broker or implementation be delayed until at least security because their systems are one year after the date guidance custodian to another broker or already designed to track the time and custodian, the 2015 final regulations do resolving all issues raised by the amount of actual dividends. Many comment is issued. The primary reasons not treat that transfer as a payment. A withholding agents, however, have comments provided for the requests to comment noted that it is common for contractual agreements with customers delay implementation were the need for investors to change relationships with that prohibit withholding earlier than a additional guidance, the need for brokers and custodians who hold their date permitted by regulations. additional time to make systems securities, which may result in section The Treasury Department and the IRS operational, and the recent release of 871(m) transactions being transferred appreciate that some withholding agents additional QDD guidance in the QI from one broker or custodian to another. would rather not develop new systems Notice and in Notice 2016–76. The comment asserted that it is to track dividend equivalents over Comments also requested a delay in the inappropriate and burdensome for a multiple years, while other financial combination rule generally. Another withholding agent to be responsible for institutions prefer the time for comment agreed with the request for a dividend equivalent amount withholding provided by § 1.1441– delayed effective date for the calculations relating to dividends that 2(e)(7). To accommodate both combination rule, unless the rule was occurred before the date that the new approaches, the Treasury Department revised to require withholding agents broker or custodian holds the section and the IRS are amending the only to combine transactions that the 871(m) transaction on behalf of a long regulations to allow withholding agents withholding agent has actual knowledge party. The comment recommended that the flexibility to withhold either based are priced, marketed, or sold in the Treasury Department and the IRS on the ‘‘later of’’ rule, as determined connection with each other. A comment amend the 2015 final regulations to under § 1.1441–2(e)(7), or on the also requested a transition period until provide that a transfer of a section dividend payment date for the December 31, 2018, for enforcement and 871(m) transaction from one broker or underlying security. This change will administration of QDD obligations. custodian to another, without a change allow withholding agents that prefer to The 2013 proposed regulations in beneficial ownership, constitutes a withhold on the dividend payment date provided that the proposed sections payment for purposes of § 1.1441– to do so, without eliminating the ‘‘later would apply to payments made on or 2(e)(7). of’’ rule in § 1.1441–2(e)(7) that after the date the regulations were generally ties withholding to a cash finalized. However, when the The Treasury Department and the IRS payment. As discussed in Part IX.F of regulations were finalized in 2015, the agree that requiring a broker or this preamble, if a withholding agent Treasury Department and the IRS custodian to withhold on dividend acts as a QDD, it will be required to use provided that the regulations generally equivalent payments that occurred the dividend payment date. would only apply to transactions issued before holding a section 871(m) A withholding agent that chooses to on or after January 1, 2017, to ensure transaction on behalf of a customer withhold on the dividend payment date adequate time to develop systems would be burdensome to the for the underlying security referenced needed to implement the regulations. withholding agent. As a result, by the section 871(m) transaction must Both the 2015 regulations and the § 1.1441–2(e)(7) is revised to provide apply the election consistently to all amendments to those regulations that that a payment of a dividend equivalent section 871(m) transactions of the same are included in these regulations, many occurs when a section 871(m) type. In other words, a withholding of which were previously announced in transaction is transferred to an account agent that chooses to withhold on the the QI Notice, Notice 2016–76, and the not maintained by the withholding dividend payment date for securities 2017 QI Agreement, make the agent or upon a termination of the lending transactions must do so for all withholding required under section account relationship. securities lending transactions, but may 871(m) easier to implement and more

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administrable. In light of these number of small entities. This ■ 14. Adding new paragraph (n)(3)(i). revisions, the Treasury Department and certification is based on the fact that ■ 15. Revising paragraph (p)(1). the IRS have determined that it is not few, if any, small entities will be ■ 16. Adding paragraphs (p)(4)(iii) and necessary or appropriate to uniformly affected by these regulations. The (p)(5). extend the applicability date for all regulations primarily will affect ■ 17. Revising paragraph (q). section 871(m) transactions. In multinational financial institutions, ■ 18. Revising paragraphs (r)(3) and particular, taxpayers have had ample which tend to be larger businesses, and (r)(4). ■ time to develop systems to implement foreign persons. Therefore, a Regulatory 19. Adding paragraph (r)(5). The additions and revisions read as withholding on section 871(m) Flexibility Analysis is not required. follows: transactions that are delta one Pursuant to section 7805(f) of the Code, transactions. The Treasury Department the notice of proposed rulemaking § 1.871–15 Treatment of dividend and the IRS have determined, however, preceding this regulation was submitted equivalents. that taxpayers and withholding agents to the Chief Counsel for Advocacy of the (a) * * * (1) Broker. [Reserved]. For need additional time to implement the Small Business Administration for further guidance, see § 1.871–15T(a)(1). section 871(m) regulations for section comment on their impact on small * * * * * 871(m) transactions other than delta one business. (14) * * * (i) Simple contract. A transactions. Accordingly, these Drafting Information simple contract is an NPC or ELI for regulations postpone the which, with respect to each underlying implementation of the section 871(m) The principal authors of these security, all amounts to be paid or regulations with respect to non-delta regulations are D. Peter Merkel and received on maturity, exercise, or any one transactions until January 1, 2018. Karen Walny of the Office of Associate other payment determination date are In addition, in response to comments, Chief Counsel (International). Other calculated by reference to a single, fixed Notice 2016–76 announced transition personnel from the Treasury number of shares (as determined in relief for combined transactions by Department and the IRS also paragraph (j)(3) of this section) of the providing a simplified rule for participated in the development of these underlying security, provided that the withholding agents to determine regulations. whether transactions entered into in number of shares can be ascertained at 2017 are combined transactions. Also in List of Subjects in 26 CFR Part 1 the calculation time for the contract, and there is a single maturity or exercise response to comments, Notice 2016–76 Income taxes, Reporting and date with respect to which all amounts delayed the application of section recordkeeping requirements. 871(m) for certain exchange-traded (other than any upfront payment or any notes. Notice 2016–76 also announced Adoption of Amendments to the periodic payments) are required to be that calendar years 2017 and 2018 Regulations calculated with respect to the would be phase-in years. In enforcing Accordingly, 26 CFR part 1 is underlying security. For purposes of and administering section 871(m) (1) amended as follows: this section, a contract that provides an with respect to delta-one transactions in adjustment to the number of shares of 2017, and (2) with respect to non-delta- PART 1—INCOME TAXES the underlying security for a merger, one transactions in 2018, the IRS will stock split, cash dividend, or similar ■ Paragraph 1. The authority citation take into account the extent to which corporate action that affects all holders for part 1 is amended by removing the the taxpayer or withholding agent made of the underlying securities sectional authority for § 1.871–15 and a good faith effort to comply with the proportionately will not cease to be adding in its place a sectional authority section 871(m) regulations. Similarly, treated as referencing a single, fixed for §§ 1.871–15 and 1.871–15T to read Notice 2016–76 and the 2017 QI number of shares solely as a result of in part as follows: Agreement provide that calendar year that provision. A contract has a single 2017 will be a phase-in year for QDDs. Authority: 26 U.S.C. 7805 * * * exercise date even though it may be As discussed in Part XI.D, the 2017 QI §§ 1.871–15 and 1.871–15T also issued exercised by the holder at any time on Agreement and these regulations under 26 U.S.C. 871(m). * * * or before the stated expiration of the provide that a QDD will not be subject ■ Par. 2. Section 1.871–15 is amended contract. An NPC or ELI that includes a to withholding on actual or deemed by: term that discontinuously increases or dividends in 2017. Finally, the 2017 QI ■ 1. Revising paragraph (a)(1). decreases the amount paid or received Agreement and these final regulations ■ 2. Revising paragraph (a)(14)(i). (such as a digital option), or that do not impose tax on a QDD’s section ■ 3. Adding a new second sentence to accelerates or extends the maturity is 871(m) amount for tax years beginning paragraph (a)(14)(ii)(B). not a simple contract. A simple contract before January 1, 2018. ■ 4. Revising paragraph (c)(2)(ii). that is an NPC is a simple NPC. A ■ 5. Revising paragraph (c)(2)(iv). simple contract that is an ELI is a simple Effect on Other Documents ■ 6. Revising paragraphs (g)(2) through ELI. Notice 2010–46 (2010–24 I.R.B. 757) (g)(3), redesignating paragraph (g)(4) as * * * * * is obsolete as of January 1, 2018. (g)(5), and adding new paragraph (g)(4). (ii) * * * (B) ■ 7. Revising paragraph (h). Special Analyses Example. * * * Pursuant to paragraph ■ 8. Revising paragraphs (i)(3)(ii) and (j)(3) of the section, the ELI references 200 Certain IRS regulations, including (i)(3)(iii). shares when Stock X appreciates, but only these, are exempt from the requirements ■ 9. Adding introductory text to 100 shares when Stock X depreciates. * * * of Executive Order 12866, as paragraph (j)(1). (c) * * * supplemented and reaffirmed by ■ 10. Adding paragraph (j)(4). (2) * * * (ii) Section 305 Executive Order 13563. Therefore, a ■ 11. Revising paragraph (l)(2). coordination. A dividend equivalent regulatory impact assessment is not ■ 12. Revising paragraph (l)(4). received by a long party, who is a required. It is hereby certified that these ■ 13. Redesignating paragraphs (n)(3)(i) shareholder as defined in § 1.305–1(d) regulations will not have a significant and (n)(3)(ii) as (n)(3)(ii) and (n)(3)(iii), of an instrument that gives rise to a economic impact on a substantial respectively. dividend pursuant to sections 305(b)

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and (c) (including a debt instrument that than 14 calendar days before the differences between the expected is convertible into shares of stock and potential section 871(m) transaction is changes in value of that complex stock that is convertible into shares of issued, the calculation time is when the contract and its initial hedge with the another class of stock) that is also a potential section 871(m) transaction is differences between the expected section 871(m) transaction, is reduced issued. changes in value of a simple contract by any amount treated as a dividend by (iii) Pricing time. A potential section benchmark (as described in paragraph sections 305(b) and (c) to the long party. 871(m) transaction is priced when all (h)(2) of this section) and its initial For other section 871(m) transactions material economic terms for the hedge. If the complex contract contains that reference an underlying security transaction have been agreed upon, more than one reference to a single that is an instrument treated as paying including the price at which the underlying security, all references to a dividend pursuant to sections 305(b) transaction is sold. that underlying security are taken into and (c) and for which the long party is (3) Simplified delta calculation for account for purposes of applying the not a shareholder as defined in § 1.305– certain simple contracts that reference substantial equivalence test with respect 1(d), the dividend equivalent received multiple underlying securities. If an to that underlying security. With respect by the long party with respect to the NPC or ELI references 10 or more to an equity derivative that is embedded section 871(m) transaction includes underlying securities and an exchange- in a debt instrument or other derivative, (and is not reduced by) any amount traded security (for example, an the substantial equivalence test is treated as a dividend pursuant to exchange-traded fund) is available that applied to the complex contract without sections 305(b) and (c). would fully hedge the NPC or ELI at the taking into account changes in the * * * * * calculation time, the delta of the NPC or market value of the debt instrument or (iv) Payments made pursuant to ELI may be calculated by determining other derivative that are not directly annuity, endowment, and life insurance the ratio of the change in the fair market related to the equity element of the contracts—(A) Insurance contracts value of the simple contract to a small instrument. The complex contract is a issued by domestic insurance change in the fair market value of the section 871(m) transaction with respect companies. A payment made pursuant exchange-traded security. A delta to an underlying security if, for that to a contract that is an annuity, determined under this paragraph (g)(3) underlying security, the expected endowment, or life insurance contract must be used as the delta for each change in value of the complex contract issued by a domestic corporation underlying security for purposes of and its initial hedge is equal to or less (including its foreign or U.S. possession calculating the amount of a dividend than the expected change in value of the branch) that is a life insurance company equivalent as provided in paragraph simple contract benchmark and its described in section 816(a) does not (j)(1)(ii) of this section. initial hedge when the substantial include a dividend equivalent if the (4) Delta calculation for listed equivalence test described in this payment is subject to tax under section options—(i) In general. The delta of an paragraph (h) is calculated at the 871(a) or section 881. option contract that is listed on a calculation time for the complex (B) Insurance contracts issued by regulated exchange described in contract. To the extent that the steps of foreign insurance companies. A paragraph (g)(4)(ii) of this section is the the substantial equivalence test set out payment does not include a dividend delta of that option at the close of in this paragraph (h) cannot be applied equivalent if it is made pursuant to a business on the business day before the to a particular complex contract, a contract that is an annuity, endowment, date of issuance. On the date an option taxpayer must use the principles of the or life insurance contract issued by a contract is listed for the first time, the substantial equivalence test to foreign corporation that would be delta is the delta of that option at the reasonably determine whether the subject to tax under subchapter L if it close of business on the date of complex contract is a section 871(m) were a domestic corporation. issuance. Notwithstanding the transaction with respect to each (C) Insurance contracts held by preceding two sentences, the delta of a underlying security. For purposes of foreign insurance companies. A listed option that is also a customized this section, the test must be applied payment made pursuant to a policy of option is determined under the rules of and the inputs must be determined in a insurance (including a policy of paragraphs (g)(2) and (g)(3) of this commercially reasonable manner. The reinsurance) does not include a section. term of the simple contract benchmark dividend equivalent if it is made to a (ii) Regulated exchange. For purposes must be, and the inputs must use, a foreign corporation that would be of paragraph (g)(4)(i) of this section, a reasonable time period, consistently subject to tax under subchapter L if it regulated exchange is any exchange that applied (for example, in determining the were a domestic corporation. is either: standard deviation and probability). If a * * * * * (A) Described in paragraph (l)(3)(vii) taxpayer calculates any relevant input (g) * * * of this section; or for non-tax business purposes, that (2) Time for determining delta—(i) In (B) [Reserved]. For further guidance, input ordinarily is the input used for general. Except as provided in see § 1.871–15T(g)(4)(ii)(B). purposes of this section. paragraph (g)(4) of this section, the delta * * * * * (2) Simple contract benchmark. The of a potential section 871(m) transaction (h) Substantial equivalence test—(1) simple contract benchmark is an actual is determined at the calculation time for In general. The substantial equivalence or hypothetical simple contract that, at the potential section 871(m) transaction. test described in this paragraph (h) the calculation time for the complex (ii) Calculation time. The calculation applies to determine whether a complex contract, has a delta of 0.8, references time for a potential section 871(m) contract is a section 871(m) transaction. the applicable underlying security transaction is the earlier of when the The substantial equivalence test referenced by the complex contract, and potential section 871(m) transaction is assesses whether a complex contract has terms that are consistent with all the priced and when the potential section substantially replicates the economic material terms of the complex contract, 871(m) transaction is issued. performance of the underlying security including the maturity date. If an actual Notwithstanding the preceding by comparing, at various testing prices simple contract does not exist, the sentence, if the pricing time is more for the underlying security, the taxpayer must create a hypothetical

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simple contract. Depending on the initial hedge at the calculation time for initial hedge is the number of shares of complex contract, the simple contract the complex contract and the value of the exchange-traded security for benchmark might be, for example, a call the initial hedge if the price of the purposes of calculating the amount of a option, a put option, or a collar. underlying security were equal to the dividend equivalent as provided in (3) Substantial equivalence. A testing price at the calculation time for paragraph (j)(1)(iii) of this section. complex contract is a section 871(m) the complex contract. (7) Example. The following example transaction with respect to an (iii) Testing price. The testing prices illustrates the rules of paragraph (h) of underlying security if the complex must include the prices of the this section. For purposes of this contract calculation described in underlying security if the price of the example, Stock X is common stock of paragraph (h)(4) of this section results in underlying security at the calculation domestic corporation X. FI is the an amount that is equal to or less than time for the complex contract were financial institution that structures the the amount of the benchmark alternatively increased by one standard transaction described in the example, calculation described in paragraph deviation and decreased by one and is the short party to the transaction. (h)(5) of this section. standard deviation, each of which is a Investor is a nonresident alien (4) Complex contract calculation—(i) separate testing price. In circumstances individual. where using only two testing prices is In general. The complex contract Example. Complex contract that is not calculation for each underlying security reasonably likely to provide an substantially equivalent. (i) FI issues an referenced by a potential section 871(m) inaccurate measure of substantial investment contract (the Contract) that has a transaction that is a complex contract is equivalence, a taxpayer must use stated maturity of one year, and Investor computed by: additional testing prices as necessary to purchases the Contract from FI at issuance (A) Determining the change in value determine whether a complex contract for $10,000. At maturity, the Contract entitles (as described in paragraph (h)(4)(ii) of satisfies the substantial equivalence test. Investor to a return of $10,000 (i) plus 200 this section) of the complex contract If additional testing prices are used for percent of any appreciation in Stock X above with respect to the underlying security the substantial equivalence test, the $100 per share, capped at $110, on 100 shares or (ii) minus 100 percent of any at each testing price (as described in probabilities as described in paragraph depreciation in Stock X below $90 on 100 paragraph (h)(4)(iii) of this section); (h)(4)(iv) of this section must be shares. At the calculation time for the (B) Determining the change in value adjusted accordingly. Contract, the price of Stock X is $100 per of the initial hedge for the complex (iv) Probability. For purposes of share. Thus, for example, Investor will contract at each testing price; paragraphs (h)(4)(i)(D) and (E) of this receive $11,000 if the price of Stock X is $105 (C) Determining the absolute value of section, the probability of an increase by per share at maturity of the Contract, but the difference between the change in one standard deviation is the measure of Investor will receive $9,000 if the price of value of the complex contract the likelihood that the price of the Stock X is $80 per share when the Contract determined in paragraph (h)(4)(i)(A) of underlying security will increase by any matures. At issuance, FI acquires 64 shares amount from its price at the calculation of Stock X to fully hedge the Contract issued this section and the change in value of to Investor. The calculation time for this the initial hedge determined in time for the complex contract. For example is the issuance. paragraph (h)(4)(i)(B) of this section at purposes of paragraphs (h)(4)(i)(D) and (ii) The Contract references an underlying each testing price; (E) of this section, the probability of a security and is not an NPC, so it is classified (D) Determining the probability (as decrease by one standard deviation is as an ELI under paragraph (a)(4) of this described in paragraph (h)(4)(iv) of this the measure of the likelihood that the section. At the calculation time for the section) associated with each testing price of the underlying security will Contract, the Contract does not provide for an price; decrease by any amount from its price amount paid at maturity that is calculated by (E) Multiplying the absolute value for at the calculation time for the complex reference to a single, fixed number of shares each testing price determined in contract. of Stock X. When the Contract matures, the paragraph (h)(4)(i)(C) of this section by (5) Benchmark calculation. The amount paid is effectively calculated based benchmark calculation with respect to on either 200 shares of Stock X (if the price the corresponding probability for that of Stock X has appreciated up to $110) or 100 testing price determined in paragraph each underlying security referenced by shares of Stock X (if the price of Stock X has (h)(4)(i)(D) of this section; the potential section 871(m) transaction declined below $90). Consequently, the (F) Adding the product of each is determined by using the computation Contract is a complex contract described in calculation determined in paragraph methodology described in paragraph paragraph (a)(14) of this section. (h)(4)(i)(E) of this section; and (h)(4) of this section with respect to a (iii) Because it is a complex ELI, FI applies (G) Dividing the sum determined in simple contract benchmark for the the substantial equivalence test described in paragraph (h)(4)(i)(F) of this section by underlying security. paragraph (h) of this section to determine the initial hedge for the complex (6) Substantial equivalence whether the Contract is a specified ELI. FI contract. calculation for certain complex determines that the price of Stock X would (ii) Determining the change in value. contracts that reference multiple be $120 if the price of Stock X were increased by one standard deviation, and $79 if the The change in value of a complex underlying securities. If a complex price of Stock X were decreased by one contract is the difference between the contract references 10 or more standard deviation. Based on these results, FI value of the complex contract with underlying securities and an exchange- next determines the change in value of the respect to the underlying security at the traded security (for example, an Contract to be $2000 at the testing price that calculation time for the complex exchange-traded fund) is available that represents an increase by one standard contract and the value of the complex would fully hedge the complex contract deviation ($12,000 testing price minus contract with respect to the underlying at its calculation time, the substantial $10,000 issue price) and a negative $1,100 at security if the price of the underlying equivalence calculations for the the testing price that represents a decrease by security were equal to the testing price complex contract may be calculated by one standard deviation ($10,000 issue price minus $8,900 testing price). FI performs the at the calculation time for the complex treating the exchange-traded security as same calculations for the 64 shares of Stock contract. The change in value of the the underlying security. When the X that constitute the initial hedge, initial hedge of a complex contract with exchange-traded security is used for the determining that the change in value of the respect to the underlying security is the substantial equivalence calculation initial hedge is $1,280 at the testing price that difference between the value of the pursuant to this paragraph (h)(6), the represents an increase by one standard

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deviation ($6,400 at issuance compared to price that represents an increase by one 2(e)(4). The amount of the long party’s $7,680 at the testing price) and negative standard deviation by 52%, which equals tax liability, however, is determined by $1,344 at the testing price that represents a $1.586. FI multiplies the absolute value of reference to the amount that would have decrease by one standard deviation ($6,400 at the difference between the change in value of been due at the time the dividend issuance compared to $5,056 at the testing the initial hedge and the option at the testing price). price that represents a decrease by one equivalent amount is determined (iv) FI then determines the absolute value standard deviation by 48%, which equals pursuant to paragraph (j)(2) of this of the difference between the change in value $1.992. FI adds these two numbers and section based on the beneficial owners of the initial hedge and the Contract at the divides by the number of shares that at that time (for example, based on the testing price that represents an increase by constitute the initial hedge to determine that tax rate at that time, whether the long one standard deviation and a decrease by one the benchmark calculation is 4.473 ((1.586 party qualified for a treaty benefit at that standard deviation. Increased by one plus 1.992) divided by .8). time, and in the case of a partnership, standard deviation, the absolute value of the (viii) FI concludes that the Contract is not based on the partners at that time). difference is $720 ($2,000-$1,280); decreased a section 871(m) transaction because the by one standard deviation, the absolute value transaction calculation of 7.68 exceeds the * * * * * of the difference is $244 (negative $1,100 benchmark calculation of 4.473. (l) * * * minus negative $1,344). FI determines that there is a 52% chance that the price of Stock (i) * * * (2) Qualified index not treated as an X will have increased in value when the (3) * * * (ii) Publicly available underlying security—(i) In general. For Contract matures and a 48% chance that the dividend amount. For purposes of purposes of this section, a qualified price of Stock X will have decreased in value paragraph (i)(3)(i) of this section, if a index is treated as a single security that at that time. FI multiplies the absolute value section 871(m) transaction references is not an underlying security. The of the difference between the change in value the same underlying securities as a determination of whether an index of the initial hedge and the Contract at the security (for example, stock in an referenced in a potential section 871(m) testing price that represents an increase by transaction is a qualified index is made one standard deviation by 52%, which equals exchange-traded fund) or index for $374.40. FI multiplies the absolute value of which there is a publicly available at the calculation time for the the difference between the change in value of quarterly dividend amount, the publicly transaction based on whether the index the initial hedge and the Contract at the available dividend amount may be used is a qualified index on the first business testing price that represents a decrease by to determine the per-share dividend day of the calendar year containing the one standard deviation by 48%, which equals amount for the section 871(m) calculation time. $117.12. FI adds these two numbers and transaction with any adjustment for (ii) Rule for the first year of an index. divides by the number of shares that special dividends. In the case of an index that was not in constitute the initial hedge to determine that (iii) Dividend amount for a section the transaction calculation is 7.68 ((374.40 existence on the first business day of the plus 117.12) divided by 64). 871(m) transaction using the simplified calendar year containing the calculation (v) FI then performs the same calculation delta calculation. When the delta of a time for the transaction, paragraph (l)(2) with respect to the simple contract section 871(m) transaction is of this section is applied by testing the benchmark, which is a one-year call option determined under paragraph (g)(3) of index on the first business day it is that references one share of Stock X, settles this section, the per-share dividend created, and the dividend yield on the same date as the Contract, and has a amount for that section 871(m) calculation required by paragraph delta of 0.8. The one-year call option has a transaction must be determined using (l)(3)(vi) of this section is determined by strike price of $79 and has a cost (the the dividend amount for the exchange- using the dividend yield that the index purchase premium) of $22. The initial hedge traded security that would fully hedge for the one-year call option is 0.8 shares of would have had in the immediately Stock X. the section 871(m) transaction (whether preceding year if it had the same (vi) FI first determines that the change in or not the exchange-traded security is components throughout that year that it value of the simple contract benchmark is actually acquired). has on the day it is created. $19.05 if the testing price is increased by one * * * * * * * * * * standard deviation ($22.00 at issuance to (j) * * * (1) Calculation of the (4) Safe harbor for certain indices that $41.05 at the testing price) and negative amount of a dividend equivalent. The reference assets other than underlying $20.95 if the testing price is decreased by one long party is liable for tax on any standard deviation ($22.00 at issuance to securities. Notwithstanding paragraph dividend equivalents required to be $1.05 at the testing price). Second, FI (l)(3) of this section, an index is a determined pursuant to paragraph (j)(2) determines that the change in value of the qualified index if the index is widely of this section only with respect to initial hedge is $16.00 at the testing price that traded, the referenced component dividend equivalents that arise while represents an increase by one standard underlying securities in the aggregate deviation ($80 at issuance to $96 at the the long party is a party to the comprise 10 percent or less of the testing price) and negative $16.80 at the transaction. The amount of any weighting of the component securities testing price that represents a decrease by dividend equivalent is determined as in the index, and the index was not one standard deviation ($80.00 at issuance to follows: $63.20 at the testing price). formed or availed of with a principal (vii) FI determines the absolute value of the * * * * * purpose of avoiding U.S. withholding difference between the change in value of the (4) Taxable year of a dividend tax. equivalent. A long party is liable for tax initial hedge and the one-year call option at * * * * * the testing price that represents an increase on a dividend equivalent in the year the by one standard deviation is $3.05 ($16.00 dividend equivalent is subject to (n) * * * minus $19.05). FI next determines the withholding pursuant to § 1.1441– (3) Short party presumptions absolute value of the difference between the 2(e)(7). Notwithstanding the preceding regarding combined transactions—(i) In change in value of the initial hedge and the sentence, a long party that is a qualified general. If a short party relies on the option at the testing price that represents a decrease by one standard deviation is $4.15 derivatives dealer is liable for tax on a presumption provided in paragraph (negative $16.80 minus negative $20.95). FI dividend equivalent when the (n)(3)(ii) of this section or in paragraph multiplies the absolute value of the applicable dividend on the underlying (n)(3)(iii) of this section, the short party difference between the change in value of the security would be subject to is not required to treat those potential initial hedge and the option at the testing withholding pursuant to § 1.1441– section 871(m) transactions as part of a

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single transaction pursuant to paragraph (q) Dividend and dividend equivalent (i) The qualified derivatives dealer’s (n)(1) of this section. payments to a qualified derivatives net delta exposure to the underlying * * * * * dealer—(1) In general. Except as security for the applicable dividend, (p) * * * (1) Responsible party—(i) In otherwise provided in this paragraph multiplied by; general. If a broker or dealer is a party (q), a qualified derivatives dealer (ii) The applicable dividend amount to a potential section 871(m) transaction described in § 1.1441–1(e)(6) that per share. with a counterparty or customer that is receives a payment (within the meaning (4) Net delta exposure. The net delta not a broker or dealer, the broker or of paragraph (i) of this section) of a exposure to an underlying security is dealer is required to determine whether dividend equivalent in its equity the amount (measured in number of the potential section 871(m) transaction derivatives dealer capacity will not be shares) by which (A) the aggregate is a section 871(m) transaction. If both liable for tax under section 881 on that number of shares of an underlying parties to a potential section 871(m) dividend equivalent, provided that the security that the qualified derivatives transaction are brokers or dealers, or qualified derivatives dealer complies dealer has exposure to as a result of neither party to a potential section with its obligations under the qualified positions in the underlying security 871(m) transaction is a broker or dealer, intermediary agreement described in (including as a result of owning the the short party must determine whether §§ 1.1441–1(e)(5) and 1.1441–1(e)(6). A underlying security) with values that the potential section 871(m) transaction qualified derivatives dealer is liable for move in the same direction as the is a section 871(m) transaction. tax under section 881(a)(1) on its section underlying security (the long positions) (ii) [Reserved]. For further guidance, 871(m) amount for each dividend on exceeds (B) the aggregate number of see § 1.871–15T(p)(1)(ii). each underlying security. This tax shares of an underlying security that the (iii) [Reserved]. For further guidance, liability is reduced (but not below zero) qualified derivatives dealer has see § 1.871–15T(p)(1)(iii). by the amount of tax paid by the exposure to as a result of positions in (iv) [Reserved]. For further guidance, qualified derivatives dealer under the underlying security with values that see § 1.871–15T(p)(1)(iv). section 881(a)(1) on dividends it move in the opposite direction from the (v) Obligations of the responsible receives with respect to that underlying underlying security (the short party. The party to the transaction that security on that same dividend in its positions). The net delta exposure is required to determine whether a capacity as an equity derivatives dealer. calculation only includes long positions transaction is a section 871(m) In addition, a qualified derivatives and short positions that the qualified transaction must also determine and dealer is liable for tax under section derivatives dealer holds in its equity report to the counterparty or customer 881(a)(1) for all dividend equivalents it derivatives dealer capacity (as described the timing and amount of any dividend receives that are not received in its in paragraph (q)(2) of this section). Any equivalent (as described in paragraphs equity derivatives dealer capacity. A long positions or short positions that are (i) and (j) of this section). Except as qualified derivatives dealer also is liable treated as effectively connected with the otherwise provided in paragraph (n)(3) for tax under section 881(a)(1) for all qualified derivatives dealer’s conduct of of this section, the party required to dividends it receives, other than a trade or business in the United States make the determinations described in dividends received in 2017 in its equity for U.S. federal income tax purposes are this paragraph is required to exercise derivatives dealer capacity. This excluded from the net delta exposure reasonable diligence to determine paragraph does not apply for a qualified computation. The net delta exposure to whether a transaction is a section derivatives dealer that is a foreign an underlying security is determined at 871(m) transaction, the amount of any branch of a United States financial the end of the day on the date provided dividend equivalents, and any other in § 1.871–15(j)(2) for the applicable information necessary to apply the rules institution (within the meaning of § 1.1471–5(e)). dividend. For purposes of this of this section. The information must be calculation, net delta must be provided in the manner prescribed in (2) Transactions on the books of an equity derivatives dealer. Transactions determined in a commercially paragraphs (p)(2) and (p)(3) of this reasonable manner. If a qualified section. The determinations required by properly reflected in a qualified derivatives dealer calculates net delta paragraph (p) of this section are binding derivatives dealer’s equity derivatives for non-tax business purposes, the net on the parties to the potential section dealer book are presumed to be held by delta ordinary will be the delta used for 871(m) transaction and on any person the dealer in its equity derivatives that purpose, subject to the who is a withholding agent with respect dealer capacity for purposes of modifications required by this to the potential section 871(m) determining the qualified derivatives definition. Each qualified derivatives transaction unless the person knows or dealer’s tax liability. For purposes of dealer must determine its net delta has reason to know that the information determining whether a dealer is acting exposure separately only taking into received is incorrect. The in its equity derivatives dealer capacity, account transactions that are recognized determinations are not binding on the only the dealer’s activities as an equity Commissioner. derivatives dealer are taken into and are attributable to that qualified derivatives dealer for U.S. federal * * * * * account. Accordingly, for purposes of this paragraph (q), a dividend or income tax purposes. (4) * * * (5) Examples. The following examples (iii) Recordkeeping required for dividend equivalent is treated as illustrate the rules of this paragraph (q): certain options. With respect to any received by a qualified derivatives option to which paragraph (g)(4) of this dealer acting in its non-equity Example 1. Forward contract entered into section applies, contemporaneous derivatives dealer capacity if the by a foreign equity derivatives dealer. (i) documentation is not required to be dividend or dividend equivalent is Facts. FB is a foreign bank that is a qualified intermediary that acts as a qualified retained provided that there is a pre- received by a qualified derivatives dealer acting as a proprietary trader. derivatives dealer. On April 1, Year 1, FB existing documented methodology that enters into a cash settled forward contract is sufficient to permit the delta for the (3) Section 871(m) amount. For each initiated by a foreign customer (Customer) transaction to be verified at a later time. dividend on each underlying security, that entitles Customer to receive from FB all (5) [Reserved]. For further guidance, the section 871(m) amount is the of the appreciation and dividends on 100 see § 1.871–15T(p)(5). product of: shares of Stock X, and obligates Customer to

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pay FB any depreciation on 100 shares of option has a delta of 0.5, and FB hedges the a qualified resident of a country that provides Stock X, at the end of three years. FB hedges call option by entering into a total return withholding on dividends at a 15 percent the forward contract by entering into a total swap that references 50 shares of Stock X rate, U.S. Broker is required withhold on the return swap contract with a domestic broker with U.S. Broker. At the end of the day on dividends with respect to the 50 shares of (U.S. Broker) and maintains the swap the date provided in paragraph (j)(2) of this stock held by FB. FB’s net delta exposure is contract as a hedge for the duration of the section for the dividend, the call option has two shares of Stock X at the end of the day forward contract. The swap contract entitles a delta of 0.6, FB hedges the call option with on the date provided in paragraph (j)(2) of FB to receive an amount equal to all of the a total return swap that references 60 shares this section because FB has a long position dividends on 100 shares of Stock X and of Stock X with U.S. Broker, and FB has no of 50 shares, reduced by FB’s short position obligates FB to pay an amount referenced to shares of Stock X or other transactions that of 48 shares as a result of the option. FB’s a floating interest rate each quarter, and also reference Stock X. section 881 tax on the $0.50 (two shares entitles FB to receive from or pay to U.S. (ii) Application of rules. At the end of the multiplied by a dividend of $0.25 per share) Broker, as the case may be, the difference day on the date provided in paragraph (j)(2) is reduced (but not below zero) by the section between the value of 100 shares of Stock X of this section for the dividend, FB is a long 881 tax amount paid by qualified derivatives at the inception of the swap and the value party on 60 shares of Stock X through the dealer on the 50 shares. Therefore, FB’s of 100 shares of Stock X at the end of 3 years. total return swap and a short party on an section 871(m) amount is zero. Stock X pays a quarterly dividend of $0.25 option. Because the option has a delta of less per share. At the end of the day on the date than 0.8 at the calculation time, it is not a (r) * * * provided in paragraph (j)(2) of this section for section 871(m) transaction. Therefore, there (3) Effective/applicability date for the dividend, FB owns the forward contract will be no dividend equivalent payments paragraphs (d)(2) and (e). Paragraphs and total return swap; FB does not own any made by FB to Customer that are subject to (d)(2) and (e) of this section apply to any shares of Stock X or any other transactions withholding. Pursuant to § 1.1441– payment made on or after January 1, that reference Stock X. FB provides valid 1(b)(4)(xxii), U.S. Broker is not obligated to 2017, with respect to any transaction documentation to U.S. Broker that FB will withhold on the dividend equivalents with receive payments under the swap contract in respect to Stock X paid to FB because U.S. with a delta of one issued on or after its capacity as a qualified derivatives dealer, Broker has received valid documentation that January 1, 2017. Paragraphs (d)(2) and and FB contemporaneously enters both the it may rely upon to treat the dividend (e) of this section apply to any payment swap contract with U.S. Broker and the equivalents as paid to FB acting as a qualified made on or after January 1, 2018, with forward contract with Customer on its equity derivatives dealer. The net delta exposure is respect to any other transaction issued derivatives dealer books. zero at the end of the day on the date on or after January 1, 2018. (ii) Application of rules. At the end of the provided in paragraph (j)(2) of this section for Notwithstanding the prior sentence, day on the date provided in paragraph (j)(2) the dividend because FB has a long position paragraphs (d)(2) and (e) of this section of this section for the dividend, FB is a long of 60 shares as a result of the total return will apply to any payments made on or party on a delta one contract (the total return swap, which is reduced by FB’s short swap) and a short party on a delta one position of 60 shares as a result of the option. after January 1, 2020, with respect to the contract (the forward contract with Example 3. In-the-money option contract exchange-traded notes issued on or after Customer). Pursuant to § 1.1441–1(b)(4)(xxii), entered into by a foreign equity derivatives January 1, 2017, that are identified in a U.S. Broker is not obligated to withhold on dealer. (i) Facts. The facts are the same as separate notice, and not payments made the dividend equivalent payments to FB on Example 2, but Customer purchases from FB before January 1, 2020, with respect to the swap contract that are referenced to Stock an in-the-money call option on 100 shares of those notes. Notwithstanding the first X dividends because U.S. Broker has Stock X with a term of one year. The call sentence of this paragraph (r)(3), received valid documentation that it may rely option has a delta of 0.8 and FB hedges the paragraphs (d)(2) and (e) of this section upon to treat the payment as made to FB call option by purchasing 80 shares of Stock do not apply to payments made in 2017 acting as a qualified derivatives dealer. X, which are held in an account with U.S. Pursuant to paragraph (q)(1) of this section, Broker, who also acts as paying agent. The to a qualified derivatives dealer in its FB is not liable for tax under sections 871(m) price of Stock X declines substantially and equity derivatives dealer capacity to and 881 on the payments it receives from the option lapses unexercised. At the end of hedge transactions that have a delta of U.S. Broker referenced to Stock X dividends the day on the date provided in paragraph less than one. because FB’s net delta exposure with respect (j)(2) of this section for the dividend, the call (4) Effective/applicability date for to 100 shares of Stock X is zero at the end option has a delta of 0.48 and FB has reduced paragraphs (c)(2)(iv), (h), and (q) of this of the day on the date provided in paragraph its hedge to 50 shares of Stock X with U.S. section. Paragraphs (c)(2)(iv), (h), and (j)(2) of this section for the dividend. The net Broker. In addition, on that date, FB owns no (q) of this section apply to payments delta exposure is zero because the taxpayer other shares of Stock X or any other has 100 shares of Stock X long position transactions that reference Stock X in its made on or after January 1, 2017. exposure as a result of the total return swap equity derivatives dealer capacity. (5) Effective/applicability date for that is reduced by 100 shares of Stock X short (ii) Application of rules. At the end of the paragraphs (g)(4)(ii)(B), (p)(1)(ii) position exposure as a result of the forward day on the date provided in paragraph (j)(2) through (iv), and (p)(5) of this section. contract. FB is required to withhold on of this section for the dividend, FB is a long [Reserved]. For further guidance, see dividend equivalent payments to Customer party on 50 shares of Stock X and a short § 1.871–15T(r)(5). on the forward contract in accordance with party on an option. Because the option has § 1.1441–2(e)(7). a delta of 0.8 at the calculation time, it is a § 1.871–15 [Amended] Example 2. At-the-money option contract section 871(m) transaction. Therefore, FB is ■ entered into by a foreign equity derivatives required to withhold on dividend equivalent Par. 3. For each section listed in the dealer. (i) Facts. The facts are the same as payments to Customer on the option contract table, remove the language in the Example 1, but Customer purchases from FB in accordance with § 1.1441–2(e)(7). U.S. ‘‘Remove’’ column and add in its place an at-the-money call option on 100 shares of Broker is required to withhold on the Stock the language in the ‘‘Add’’ column as set Stock X with a term of one year. The call X dividends paid to FB. Assuming that FB is forth below:

Section Remove Add

§ 1.871–15(a)(3) ...... section 316 ...... section 316 (even if there is no actual dis- tribution of cash or property). § 1.871–15(a)(5) ...... the time the NPC or ELI is issued, ...... the calculation time for the NPC or ELI,. § 1.871–15(a)(14)(ii)(B), newly designated third issuance ...... the calculation time. sentence.

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Section Remove Add

§ 1.871–15(a)(15), first sentence ...... a payment with respect to ...... § 1.871–15(c)(1) introductory text ...... paragraph (2) ...... paragraph (c)(2) of this section. § 1.871–15(c)(1)(i) ...... references the payment of a dividend ...... references a dividend. § 1.871–15(c)(1)(ii) ...... references the payment of a dividend ...... references a dividend. § 1.871–15(c)(1)(iii) ...... references the payment of a dividend ...... references a dividend. § 1.871–15(c)(2)(i), first sentence and second section 871 ...... section 871(a). sentence. § 1.871–15(d)(2)(i) ...... when the NPC is issued ...... at the calculation time for the NPC. § 1.871–15(d)(2)(ii) ...... when the NPC is issued ...... at the calculation time for the NPC. § 1.871–15(e)(1) ...... when the ELI is issued ...... at the calculation time for the ELI. § 1.871–15(e)(2) ...... when the ELI is issued ...... at the calculation time for the ELI. § 1.871–15(i)(1) ...... references the payment of a dividend ...... references a dividend. § 1.871–15(i)(2)(i) ...... estimated payment of dividends ...... estimated dividend. § 1.871–15(i)(2)(ii) ...... estimated dividend payment ...... estimated dividend. § 1.871–15(i)(2)(iii), first sentence and second the time the transaction is issued ...... the calculation time. sentence. § 1.871–15(i)(2)(iii), last sentence ...... to pay a dividend ...... to have a dividend. § 1.871–15(j)(1)(i) ...... each underlying security ...... each dividend on an underlying security. § 1.871–15(j)(1)(ii) introductory text ...... each underlying security ...... each dividend on an underlying security. § 1.871–15(j)(1)(iii) introductory text ...... each underlying security ...... each dividend on an underlying security. § 1.871–15(l)(1), first sentence ...... The purpose of this section ...... The purpose of this paragraph (l). § 1.871–15(l)(1), second sentence ...... described in this paragraph ...... described in this paragraph (l). § 1.871–15(l)(7) ...... references a security (for example, stock in references an exchange-traded fund. an exchange-traded fund). § 1.871–15(m)(2)(ii), first sentence ...... at the time the potential 871(m) transaction at the calculation time for the potential section referencing that partnership interest is 871(m) transaction referencing that partner- issued. ship interest. § 1.871–15(m)(2)(ii), first sentence ...... paragraph (m)(2)(i) ...... paragraph (m)(2)(i) of this section. § 1.871–15(n)(4)(iii), heading and first sentence less than ...... fewer than. § 1.871–15(p)(4)(ii) ...... 10 business days of the date the potential 10 business days of the date containing the section 871(m) transaction is issued. calculation time for the potential section 871(m) transaction. § 1.871–15(r)(4), heading ...... paragraphs (c)(2)(iv), (h), and (q) ...... paragraphs (g)(4)(ii)(B), (p)(1)(ii) through (iv), and (p)(5).

■ Par. 4. Revise § 1.871–15T to read as (3) Has rules that effectively promote 871(m) transaction. For a potential follows: active trading of listed options on the section 871(m) transaction in which exchange; and neither the short party nor any agent or § 1.871–15T Treatment of dividend intermediary acting on behalf of the equivalents (temporary). (4) Has an average daily trading volume on the exchange exceeding $10 short party is a broker or dealer, and the (a) [Reserved]. For further guidance, billion during the immediately long party and an agent or intermediary see § 1.871–15(a). preceding calendar year. If an exchange acting on behalf of the long party are a (1) Broker. A broker is a broker within in a foreign country has more than one broker or dealer, or more than one agent the meaning provided in section tier or market level on which listed or intermediary acting on behalf of the 6045(c), except that the term does not options may be separately listed or long party is a broker or dealer, the include any corporation that is a broker traded, each tier or market level is broker or dealer that is a party to the solely because it regularly redeems its treated as a separate exchange. transaction and closest to the long party own shares. (g)(5) through (p)(1)(i) [Reserved]. For in the payment chain must determine whether the potential section 871(m) (a)(2) through (g)(4)(ii)(A) [Reserved]. further guidance, see § 1.871–15(g)(5) transaction is a section 871(m) For further guidance, see § 1.871– through (p)(1)(i). transaction. 15(a)(2) through (g)(4)(ii)(A). (ii) Transactions with multiple brokers. For a potential section 871(m) (iii) Responsible party for transactions (B) A foreign securities exchange that: transaction in which both the short traded on an exchange and cleared by (1) Is regulated or supervised by a party and an agent or intermediary a clearing organization. Except as governmental authority of the country acting on behalf of the short party are provided in paragraph (p)(1)(iv) of this in which the market is located; a broker or dealer, the short party must section, for a potential section 871(m) (2) Has trading volume, listing, determine whether the potential section transaction that is traded on an financial disclosure, surveillance, and 871(m) transaction is a section 871(m) exchange and cleared by a clearing other requirements designed to prevent transaction. For a potential section organization, and for which more than fraudulent and manipulative acts and 871(m) transaction in which the short one broker-dealer acts as an agent or practices, to remove impediments to party is not a broker or dealer and more intermediary between the short party and perfect the mechanism of a free and than one agent or intermediary acting on and a foreign payee, the broker or dealer open, fair and orderly market, and to behalf of the short party is a broker or that has an ongoing customer protect investors, and the laws of the dealer, the broker or dealer that is a relationship with the foreign payee with country in which the exchange is party to the transaction and closest to respect to that transaction (generally the located and the rules of the exchange the short party in the payment chain clearing firm) must determine whether ensure that those requirements are must determine whether the potential the potential section 871(m) transaction actually enforced; section 871(m) transaction is a section is a section 871(m) transaction.

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(iv) Responsible party for certain paragraph (e)(6) of this section). For 1442 and for the purpose of reporting structured notes, warrants, and purposes of this withholding and withholding under other provisions convertible instruments. When a exemption, the qualified derivatives of the Code, such as the provisions potential section 871(m) transaction is a dealer must furnish to the withholding under chapter 61 and section 3406 (and structured note, warrant, convertible agent the documentation described in the regulations under those provisions), stock, or convertible debt, the issuer is paragraph (e)(3)(ii) of this section. A or for the qualified derivative dealer (if the party responsible for determining withholding agent that makes a payment applicable). Furnishing such a whether a potential section 871(m) to a qualified intermediary that is acting certificate is in lieu of transmitting to a transaction is a section 871(m) as a qualified derivatives dealer is not withholding agent withholding transaction. required to withhold on the following certificates or other appropriate (p)(1)(v) through (p)(4) [Reserved]. For payments if the withholding agent can documentation for the persons for further guidance, see § 1.871–15(p)(1)(v) reliably associate the payment with a whom the qualified intermediary through (p)(4). valid qualified intermediary receives the payment, including interest (5) Example. The following example withholding certificate as described in holders in a qualified intermediary that illustrates the rules of paragraph (p) of paragraph (e)(3)(ii) of this section, is fiscally transparent under the this section: including the certification described in regulations under section 894. Although Example 1. CO is a domestic clearing paragraph (e)(3)(ii)(E): the qualified intermediary is required to organization and is not a broker as defined (A) A payment with respect to a obtain withholding certificates or other in § 1.871–15(a)(1). CO serves as a central potential section 871(m) transaction that appropriate documentation from counterparty clearing and settlement service is not an underlying security; beneficial owners, payees, or interest provider for derivatives exchanges in the (B) A payment of a dividend holders pursuant to its agreement with United States. EB and CB are brokers equivalent; or the IRS, it is generally not required to organized in the United States and members (C) A payment of a dividend in 2017. attach such documentation to the of CO. FC, a foreign corporation, instructs EB intermediary withholding certificate. to execute the purchase of a call option that * * * * * (e) * * * Notwithstanding the preceding is a specified ELI (as described in § 1.871– sentence, a qualified intermediary must 15(e)). EB effects the trade for FC on the (2) * * * exchange and then, as instructed by FC, (i) * * * For purposes of a qualified provide a withholding agent with the transfers the option to CB to be cleared with intermediary acting as a qualified Forms W–9, or disclose the names, CO. The exchange matches FC’s order with derivatives dealer, a qualified addresses, and taxpayer identifying an order for a written call option with the intermediary withholding certificate, as numbers, if known, of those U.S. non- same terms and then sends the matched trade described in paragraph (e)(3)(ii) of this exempt recipients for whom the to CO, which clears the trade. CB and the section is a beneficial owner qualified intermediary receives clearing member representing the person withholding certificate for purposes of reportable amounts (within the meaning who sold the call option settle the trade with treaty claims for dividends. of paragraph (e)(3)(vi) of this section) to CO. Upon receiving the matched trade, the the extent required in the qualified * * * * * option contracts are novated and CO becomes intermediary’s agreement with the IRS. the counterparty to CB and the counterparty (3) * * * When a qualified intermediary is acting to the clearing member representing the (ii) * * * person who sold the call option. Both EB and (E) In the case of any payment with as a qualified derivatives dealer, the CB are broker-dealers acting on behalf of FC respect to a potential section 871(m) withholding certificate entitles a for a potential section 871(m) transaction. transaction (including any dividend withholding agent to make payments Under paragraph (p)(1)(iii) of this section, equivalent payment within the meaning with respect to potential section 871(m) however, only CB is required to make the transactions that are not underlying of § 1.871–15(i)) or underlying security determinations described in § 1.871–15(p). securities and dividend equivalent (as defined in § 1.871–15(a)(15)) payments on underlying securities to (q) through (r)(4) [Reserved]. For received by a qualified intermediary the qualified derivatives dealer free of further guidance, see § 1.871–15(r)(1) acting as a qualified derivatives dealer, withholding. A withholding agent is through (4). a certification that the home office or required to withhold on all other U.S. (5) Effective/applicability date. This branch receiving the payment, as source FDAP payments made to a section applies to payments made on or applicable, meets the requirements to qualified derivatives dealer as required after on January 19, 2017. act as a qualified derivatives dealer as by applicable law. Paragraph (e)(6) of (s) Expiration date. This section further described in paragraph (e)(6) of this section contains detailed rules expires January 17, 2020. this section and that the qualified ■ Par. 5. Section 1.1441–1 is amended prescribing the circumstances in which derivatives dealer assumes primary a qualified intermediary can act as a by: withholding and reporting ■ 1. Revising paragraphs (b)(4)(xxii), qualified derivatives dealer. A person responsibilities under chapters 3, 4, and may claim qualified intermediary status (e)(3)(ii)(E), (e)(5),and (e)(6). 61, and section 3406 with respect to any ■ 2. Adding a new sentence to the end before an agreement is executed with payments it makes with respect to the IRS if it has applied for such status of paragraph (e)(2)(i). potential section 871(m) transactions; ■ 3. Adding new paragraph (f)(5). and the IRS authorizes such status on an The additions and revisions read as * * * * * interim basis under such procedures as (5) Qualified intermediaries—(i) In follows: the IRS may prescribe. general. A qualified intermediary, as (ii) [Reserved]. For additional § 1.1441–1 Requirement for the deduction defined in paragraph (e)(5)(ii) of this guidance, see § 1.1441–1T(e)(5)(ii). and withholding of tax on payments to section, may furnish a qualified (A) Through (C) [Reserved]. For foreign persons. intermediary withholding certificate to a additional guidance, see § 1.1441– * * * * * withholding agent. The withholding 1T(e)(5)(ii)(A)–(C). (b) * * * certificate provides certifications on (D) A foreign person that is a home (4) * * * behalf of other persons for the purpose office or has a branch that is an eligible (xxii) Certain payments to qualified of claiming and verifying reduced rates entity as described in paragraph derivatives dealers (as described in of withholding under section 1441 or (e)(6)(ii) of this section, without regard

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to the requirement that the person be a qualified derivatives dealer is required payment is treated as effectively qualified intermediary; or to obtain a withholding certificate or connected with the conduct of a trade (E) [Reserved]. For additional other appropriate documentation from or business within the United States guidance, see § 1.1441–1T(e)(5)(ii)(E). each counterparty to whom the within the meaning of section 864, and (iii) [Reserved]. For additional qualified derivatives dealer makes a not act as a qualified derivatives dealer guidance, see § 1.1441–1T(e)(5)(iii). reportable payment (including a for any other payments. For purposes of (iv) [Reserved]. For additional dividend equivalent payment within the this paragraph (E), any securities guidance, see § 1.1441–1T(e)(5)(iv). meaning of § 1.871–15(i)). The qualified lending or sale-repurchase transaction (v) [Reserved]. For additional derivatives dealer is also required to that the qualified intermediary enters guidance, see § 1.1441–1T(e)(5)(v). determine whether any payment it into that is a section 871(m) transaction (A) [Reserved]. For additional makes with respect to a potential is treated as entered into as a principal guidance, see § 1.1441–1T(e)(5)(v)(A). section 871(m) transaction is, in whole unless the qualified intermediary (B) [Reserved]. For additional or in part, a dividend equivalent; determines that it is acting as an guidance, see § 1.1441–1T(e)(5)(v)(B). (C) Agree to remain liable for tax intermediary with respect to that (1)–(3) [Reserved]. For additional under section 881, if any, on any transaction; and guidance, see § 1.1441– payment with respect to a potential 1T(e)(5)(v)(B)(1)–(3). (F) Each home office or branch must section 871(m) transaction (including a qualify and be approved for qualified (4) If a qualified intermediary is acting dividend equivalent payment within the as a qualified derivatives dealer, derivatives dealer status and must meaning of § 1.871–15(i)) and represent itself as a QDD on its Form designate the accounts: underlying securities (including (i) For which the qualified derivatives W–8IMY and separately identify the dividends) it receives as a qualified home office or branch as the recipient dealer is receiving payments with derivatives dealer, or in the case of on a withholding statement (if respect to potential section 871(m) dividend equivalents received in the necessary). The home office means a transactions or underlying securities as equity derivatives dealer capacity, the foreign person, excluding any branches a qualified derivatives dealer; taxes required pursuant to § 1.871– of the foreign person, that applies for (ii) For which the qualified 15(q); derivatives dealer is receiving payments (D) Comply with the compliance qualified derivatives dealer status. Each with respect to potential section 871(m) review procedures applicable to a home office or branch that obtains transactions (and that are not qualified intermediary that acts as a qualified derivatives dealer status must underlying securities) for which qualified derivatives dealer under the be treated as a separate qualified withholding is not required; qualified intermediary withholding derivatives dealer. (iii) For which qualified derivatives agreement, which will specify the time (ii) Definition of eligible entity. An dealer is receiving payments with and manner in which a qualified eligible entity is a home office or branch respect to underlying securities for derivatives dealer must: that is a qualified intermediary and that, which withholding is required; and (1) Certify to the IRS that it has treating the home office or branch as a (iv) If applicable, identifying the home complied with the obligations to act as separate entity, is— office or branch that is treated as the a qualified derivatives dealer (including (A) An equity derivatives dealer owner for U.S. income tax purposes; its performance of a periodic review subject to regulatory supervision as a and applicable to a qualified derivatives dealer by a governmental authority in (6) Qualified derivatives dealers—(i) dealer); the jurisdiction in which it was In general. To act as a qualified (2) Report to the IRS any amounts organized or operates; derivatives dealer under a qualified subject to reporting on Forms 1042–S (B) A bank or bank holding company intermediary withholding agreement, (including dividend equivalent subject to regulatory supervision as a the home office or branch that is a payments that it made); bank or bank holding company (as qualified intermediary must be an (3) Report to the IRS on the applicable) by a governmental authority eligible entity as described in paragraph appropriate U.S. tax return, its tax in the jurisdiction in which it was (e)(6)(ii) of this section and, in liabilities, including its tax liability organized, or operates or an entity that accordance with the qualified pursuant to § 1.871–15(q)(1) and any is wholly-owned (directly or indirectly) intermediary agreement, must— other taxes on payments with respect to by a bank or bank holding company (A) Furnish to a withholding agent a potential section 871(m) transactions or subject to regulatory supervision as a qualified intermediary withholding underlying securities as defined in bank or bank holding company (as certificate (described in paragraph § 1.871–15(a)(15) it receives; and applicable) by a governmental authority (e)(3)(ii) of this section) that indicates (4) Respond to inquiries from the IRS in the jurisdiction in which the bank or that the home office or branch receiving about obligations it has assumed as a bank holding company (as applicable) the payment is a qualified derivatives qualified derivatives dealer in a timely was organized or operates and that in its dealer with respect to the payments manner; equity derivatives dealer capacity— associated with the withholding (E) Agree to act as a qualified certificate; derivatives dealer for all payments made (1) Issues potential section 871(m) (B) Agree to assume the primary as a principal with respect to potential transactions to customers; and withholding and reporting section 871(m) transactions and all (2) Receives dividends with respect to responsibilities, including the payments received as a principal with stock or dividend equivalent payments documentation provisions under respect to potential section 871(m) pursuant to potential section 871(m) chapters 3, 4, and 61, and section 3406, transactions and underlying securities transactions that hedge potential section the regulations under those provisions, as defined in § 1.871–15(a)(15) 871(m) transactions that it issued; and other withholding provisions of the (including dividend equivalent (C) A foreign branch of a U.S. Internal Revenue Code, for payments payments within the meaning of financial institution, if the foreign made as a qualified derivatives dealer § 1.871–15(i)), excluding any payments branch would meet the requirements of with respect to potential section 871(m) made or received by the qualified paragraph (A) or (B) of this section if it transactions. For this purpose, a derivatives dealer to the extent the were a separate entity; or

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(D) Any person otherwise acceptable The revisions and additions read as the original approach throughout the to the IRS. follows: term of the transaction. When a * * * * * withholding agent changes the time that § 1.1441–2 Amounts subject to it will withhold, the withholding agent (f) * * * withholding. (5) Effective/applicability date. must notify each payee in writing that Paragraphs (e)(5)(ii)(D) and * * * * * it will withhold using the approach (e)(5)(v)(B)(4) of this section apply to (e) * * * described in paragraph (e)(7)(i) or (iv) of (7) Payments of dividend payments made on or after on January this section, as applicable, before the equivalents—(i) In general. Subject to 19, 2017. time for determining the payee’s first paragraphs (e)(7)(iv), (vi), and (vii) of ■ Par. 6. Section 1.1441–1T is amended dividend equivalent payment (as this section, a payment of a dividend determined under § 1.871–15(j)(2)). by: equivalent is not considered to be made ■ 1. Redesignating paragraph With respect to transactions held by an until the later of when— intermediary or foreign flow-through (e)(5)(ii)(D) as paragraph (e)(5)(ii)(E), (A) The amount of a dividend redesignating paragraph (e)(5)(v)(B)(4) entity, a withholding agent is treated as equivalent is determined as provided in providing notice to each payee holding as paragraph (e)(5)(v)(B)(5) and adding § 1.871–15(j)(2), and new paragraphs (e)(5)(ii)(D) and that transaction through the entity when (B) A payment occurs with respect to it notifies the intermediary or foreign (e)(5)(v)(B)(4). the section 871(m) transaction after the ■ 2. Revising paragraphs (e)(3)(ii)(E), flow-through entity of the time it will amount of a dividend equivalent is withhold, as described in the preceding (e)(5)(i), (e)(5)(v)(B)(4), and (e)(6). determined as provided in § 1.871– ■ 3. Removing the language ‘‘Except for sentence, provided that the 15(j)(2). intermediary or foreign flow-through paragraphs (e)(3)(ii)(E) and (e)(6), this (ii) Payment. For purposes of section’’ from the first sentence of entity agrees to provide the same notice paragraph (e)(7) of this section, a to each payee. The withholding agent paragraph (f)(3) and adding in its place payment occurs with respect to a ‘‘This section’’, and removing the third must attach a statement to its relevant section 871(m) transaction when— income tax return (filed by the due date, sentence in paragraph (f)(3), and (A) Money or other property is paid ■ including extensions) for the year of the 4. Removing the language ‘‘Except for to or by the long party, unless the change notifying the IRS of the change paragraphs (e)(3)(ii)(E) and (e)(6), the section 871(m) transaction is described applicability’’ from the first sentence of and when it applies, identifying the in § 1.871–15(i)(3), in which case a types of section 871(m) transaction to paragraph (g) and adding in its place payment is treated as being made at the ‘‘The Applicability’’ and removing the which the change applies, and certifying end of the applicable calendar quarter; that has notified its payees. For second sentence in paragraph (g). (B) The long party sells, exchanges, purposes of this paragraph, a transfers, or otherwise disposes of the § 1.1441–1T Requirement for the withholding agent will be considered to section 871(m) transaction (including by deduction and withholding of tax on have entered into a transaction on the payments to foreign persons (temporary). settlement, offset, termination, first date the withholding agent becomes * * * * * expiration, lapse, or maturity); or responsible for withholding on the (C) The section 871(m) transaction is (e) * * * transaction (based on the rule in transferred to an account that is not (3) * * * paragraph (e)(7)(ix) of this section). (ii) * * * maintained by the withholding agent or (vi) Withholding by qualified (E) [Reserved]. For additional the long party terminates the account derivatives dealers. A withholding agent guidance, see § 1.1441–1(e)(3)(ii)(E). relationship with the withholding agent. that is acting as a qualified derivatives * * * * * * * * * * dealer must withhold with respect to a (5) Qualified Intermediaries—(i) (iv) Option to withhold on dividend dividend equivalent payment on the [Reserved]. For additional guidance, see payment date. A withholding agent may payment date described in paragraph § 1.1441–1(e)(5)(i). withhold on the payment date described (e)(4) of this section for the applicable (ii) * * * in paragraph (e)(4) of this section for the dividend on the underlying security and (D) [Reserved]. For additional applicable dividend on the underlying must notify each payee in writing that guidance, see § 1.1441–1(e)(5)(ii)(D). security (the dividend payment date) if it will withhold on the dividend * * * * * it withholds on that date for all section payment date before the time for (v) * * * 871(m) transactions of the same type determining the payee’s first dividend (B) * * * (securities lending or sale-repurchase equivalent payment (as determined (4) [Reserved]. For additional transaction, NPC, or ELI) and satisfies under § 1.871–15(j)(2)). guidance, see § 1.1441–1(e)(5)(v)(B)(4). the requirements to paragraph (e)(7)(v) (vii) Withholding with respect to * * * * * of this section. derivatives that reference partnerships. (6) [Reserved]. For additional (v) Changes to time of withholding. To the extent that a withholding agent guidance, see § 1.1441–1(e)(6). This paragraph describes how a is required to withhold with respect to * * * * * withholding agent changes the time that a partnership interest described in ■ Par. 7. Section 1.1441–2 is amended it withholds on a dividend equivalent § 1.871–15(m), the liability for by: payment to a time described in withholding arises on March 15 of the ■ 1. Revising paragraphs (e)(7)(i) and paragraph (e)(7)(i) or (iv) of this section year following the year in which the (e)(7)(ii). and these requirements must be payment of a dividend equivalent ■ 2. Removing ‘‘paragraph (e)(8)(ii)(A)’’ satisfied for a withholding agent to (determined under § 1.871–15(i)) occurs. from paragraph (e)(7)(iii) and adding in change the time it withholds. A (viii) Notification to holders of ‘‘paragraph (e)(7)(ii)(A)’’ in its place. withholding agent must apply the withholding timing. If a withholding ■ 3. Adding paragraphs (e)(7)(iv) change consistently to all transactions of agent is required to notify a payee of through (ix). the same type entered into on or after when it will withhold under paragraph ■ 4. Revising the last sentence of the change. For transactions of the same (e)(7)(v) of this section, it may use the paragraph (f)(1) and adding a new last type entered into before the change, a reporting methods prescribed in sentence. withholding agent must withhold under § 1.871–15(p)(3)(i).

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(ix) Withholding agent responsibility. intermediary, as defined in § 1.1441–1(c)(14). trade. CB and the clearing member A withholding agent is only responsible FC is a foreign corporation that has an representing the call option seller settle the for dividend equivalent amounts account with CB. FC instructs CB to purchase trade with FCO. Upon receiving the matched determined (as provided in § 1.871– a call option that is a specified ELI (as trade, the option contracts are novated and described in § 1.871–15(e)). CB effects the FCO becomes the counterparty to CB and the 15(j)(2)) during the period the trade for FC on the exchange. The exchange withholding agent is a withholding counterparty to the clearing member matches FC’s order with an order for a representing the call option seller. To the agent for the section 871(m) transaction. written call option with the same terms. The extent that there is a dividend equivalent exchange then sends the matched trade to * * * * * with respect to the call option, both FCO and CO, which clears the trade. CB and the (f) * * * (1) Except as otherwise CB are withholding agents as described in provided in this paragraph, paragraph clearing member representing the person who sold the call option settle the trade with paragraph (a)(1) of this section. (e)(7) of this section applies to payments CO. Upon receiving the matched trade, the Example 9. The facts are the same as made on or after September 18, 2015. option contracts are novated and CO becomes Example 8, except that CB is a qualified Paragraphs (e)(7)(ii)(D) and (e)(7)(iv) the counterparty to CB and the counterparty intermediary, as defined in § 1.1441–1(c)(15), through (viii) of this section apply to to the clearing member representing the that has assumed the primary obligation to payments made on or after January 19, person who sold the call option. To the withhold, deposit, and report amounts under 2017. extent that there is a dividend equivalent chapters 3 and 4 of Internal Revenue Code. with respect to the call option, both CO and ■ Par. 8. Section 1.1441–7 is amended CB provides a written statement to FCO CB are withholding agents as described in representing that it has assumed primary by: paragraph (a)(1) of this section. As a ■ 1. Revising Example 7 in paragraph withholding responsibility for any dividend withholding agent, CO and CB must each equivalent payment with respect to the call (a)(3). determine whether it is obligated to withhold option. FCO, therefore, is not required ■ 2. Adding Example 8 and 9 to under chapter 3 of the Internal Revenue Code withhold on a dividend equivalent payment and the regulations thereunder. paragraph (a)(3). to CB. ■ 3. Adding a sentence to the end of Example 8. FCO is a foreign clearing paragraph (a)(4). organization. FCO serves as a central (4) * * * Example 8 and Example 9 The additions read as follows: counterparty clearing and settlement service provider for derivatives exchanges in of paragraph (a)(3) of this section apply § 1.1441–7 General provisions relating to Country A, a foreign country. CB is a broker to payments made on or after January withholding agents. organized in Country A, and a clearing 19, 2017. (a) * * * member of FCO. CB is a nonqualified * * * * * (3) * * * intermediary, as defined in § 1.1441–1(c)(14). FC is a foreign corporation that has an § 1.1461–1 [Amended] Example 7. CO is a domestic clearing account with CB. FC instructs CB to purchase organization. CO serves as a central a call option that is a section 871(m) ■ Par. 9. For each section listed in the counterparty clearing and settlement service transaction. CB effects the trade for FC on the provider for derivatives exchanges in the exchange. The exchange matches FC’s order table, remove the language in the United States. CB is a broker organized in with an order for a written call option with ‘‘Remove’’ column and add in its place Country X, a foreign country, and a clearing the same terms. The exchange then sends the the language in the ‘‘Add’’ column as set member of CO. CB is a nonqualified matched trade to FCO, which clears the forth below:

Section Remove Add

§ 1.1461–1(c)(2)(i) introductory text, fourth sen- a withholding agent withheld an amount ...... a withholding agent withheld (including under tence. § 1.1441–2(e)(7)) an amount. § 1.1461–1(c)(2)(i)(M) ...... references the payment of a dividend ...... references a dividend. § 1.1461–1(c)(2)(ii)(J) ...... or (xxiii); ...... or (xxiii). This exception does not apply to withholding agents that are qualified deriva- tives dealers;

John Dalrymple, DEPARTMENT OF THE TREASURY The regulations relate to the Deputy Commissioner for Services and determination of whether an interest in Enforcement. Internal Revenue Service a corporation is treated as stock or Approved: January 11, 2017. indebtedness for all purposes of the 26 CFR Part 1 Mark J. Mazur, Internal Revenue Code. Assistant Secretary of the Treasury (Tax [TD 9790] DATES: These corrections are effective Policy). on January 23, 2017, and applicable RIN 1545–BN40 [FR Doc. 2017–01163 Filed 1–19–17; 4:15 pm] October 21, 2016. BILLING CODE 4830–01–P Treatment of Certain Interests in FOR FURTHER INFORMATION CONTACT: Corporations as Stock or Austin M. Diamond-Jones, (202) 317– Indebtedness; Correction 5363, or Joshua G. Rabon, (202) 317– AGENCY: Internal Revenue Service (IRS), 6938 (not toll-free numbers). Treasury. SUPPLEMENTARY INFORMATION: ACTION: Correcting amendments. Background SUMMARY: This document contains corrections to the final and temporary The final and temporary regulations regulations (T.D. 9790) that were that are the subject of this correction are published in the Federal Register on under sections 385 and 752 of the Friday, October 21, 2016 (81 FR 72858). Internal Revenue Code.

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