The Treasury Department and the IRS are going to amend dividend equivalent payment regulations under Internal Revenue Code (IRC) Section 871(m). This amendment will yet again delay the effective/applicability date. Most importantly, the agencies have given an extension of two years on transition relief as provided in Notice 2018-72.
The notice is consistent with Executive Order 13777 signed by President Trump. It advises that the Treasury Department and IRS will continue to evaluate the regulations. It also advises that they will consider any possible actions that could reduce the unnecessary burdens that the regulations impose.
In part, Notice 2020-02 says the rules in IRC Section 871(m) will not apply to payments made respecting non-delta-one transactions. This is the case for any transactions issued before January 1, 2023. “Delta” refers to the change ratio in fair market values of an National Principal Contract (NPC) or Equity Linked Instrument (ELI). This is in respect to a slight change in fair market values of the share numbers of underlying securities referenced by the ELI or NPC.
There was an anti-abuse rule included in the regulations for IRC Section 871(m). This will continue to apply throughout the years of the Dividend Equivalent Payment Regulations phase-in described within the notice. Therefore, transactions the IRS would otherwise treat as IRC Section 871(m) transactions may be IRC Section 871(m) transactions under this rule.
If withholding agents or taxpayers comply in good faith with the regulations, the IRS will take this into consideration. This will apply when enforcing these regulations for non-delta-one transactions through 2023. It will also apply when enforcing these regulations for delta-one transactions from 2017 to 2022.
The Use of Simplified Standards
The period in which withholding agents can use “simplified standards” to determine if they can consider these transactions combined has been extended through 2022.
Withholding agents are required to combine transactions in certain cases only. The rule applies when they make transactions over the counter and market, sell, or price them in connection with each other. Taxpayers will also not need to consider any listed securities that they entered into until the end of 2022 as combined transactions. This simplified standard will, however, only apply to withholding agents. It does not apply to any taxpayers who are long parties to any potential IRC Section 871(m) transactions.
While the extension to the phase-in of Dividend Equivalent Payment Regulations may increase unnecessary burdens, the Treasury Department and the IRS have said they will commit to reducing those burdens. They also have, most importantly, given a two-year extension on transition relief. With withholding agents now being able to use simplified standards for an extended period, this will also offer benefits. They must, however, attempt to comply in good faith with the anti-abuse rules. This could cause complications for withholding agents and taxpayers alike throughout the delay to the phase-in.
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