Reg-120282-10

73128

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

balancing authority and transmission
operator responsibilities during a
system emergency.109
III. Information Collection Statement
100. The Commission’s information
collection requirements are typically
subject to review by the Office of
Management and Budget (OMB) under
section 3507(d) of the Paperwork
Reduction Act of 1995.110 However, by
remanding the TOP and IRO Reliability
Standards, any information collection
requirements are unchanged. With
regard to proposed Reliability Standard
TOP–006–3, the Commission estimates
that the information collection burden
will not change as compared to the
currently-effective standard. The
reporting requirements for transmission
operators and balancing authorities
remain unchanged because the new
requirements clarify the existing
standard that the transmission operators
report transmission information, while
the balancing authorities report
generation information.
IV. Environmental Analysis
101. The Commission is required to
prepare an Environmental Assessment
or an Environmental Impact Statement
for any action that may have a
significant adverse effect on the human
environment.111 The Commission has
categorically excluded certain actions
from this requirement as not having a
significant effect on the human
environment. Included in the exclusion
are rules that are clarifying, corrective,
or procedural or that do not
substantially change the effect of the
regulations being amended.112 The
actions proposed herein fall within this
categorical exclusion in the
Commission’s regulations.
V. Regulatory Flexibility Act
Certification

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

102. The Regulatory Flexibility Act of
1980 (RFA) 113 generally requires a
description and analysis of final rules
that will have significant economic
impact on a substantial number of small
entities. The RFA mandates
consideration of regulatory alternatives
that accomplish the stated objectives of
a proposed rule and that minimize any
significant economic impact on a
109 Electric

Reliability Organization Interpretation
of Transmission Operations Reliability Standard,
136 FERC ¶ 61,176 (2011).
110 44 U.S.C. 3507(d) (2012).
111 Order No. 486, Regulations Implementing the
National Environmental Policy Act, 52 FR 47897
(Dec. 17, 1987), FERC Stats. & Regs. Preambles
1986–1990 ¶ 30,783 (1987).
112 18 CFR 380.4(a)(2)(ii).
113 5 U.S.C. 601–612.

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

substantial number of small entities.
The Small Business Administration’s
(SBA) Office of Size Standards develops
the numerical definition of a small
business.114 The SBA has established a
size standard for electric utilities,
stating that a firm is small if, including
its affiliates, it is primarily engaged in
the transmission, generation and/or
distribution of electric energy for sale
and its total electric output for the
preceding twelve months did not exceed
four million megawatt hours.115 The
RFA is not implicated by this NOPR
because the Commission is proposing to
remand the TOP and IRO Reliability
Standards and not proposing any
modifications to the existing burden or
reporting requirements. With no
changes to the TOP and IRO Reliability
Standards as approved, the Commission
certifies that this NOPR will not have a
significant economic impact on a
substantial number of small entities.
103. In addition, for proposed
Reliability Standard TOP–006–3, the
Commission estimates that there will be
no material change in burden for all
small entities because the effect of the
changes merely clarify that transmission
operators are responsible for reporting
transmission information while
balancing authorities are responsible for
reporting generation information.
VI. Comment Procedures
104. The Commission invites
interested persons to submit comments
on the matters and issues proposed in
this notice to be adopted, including any
related matters or alternative proposals
that commenters may wish to discuss.
Comments are due February 3, 2014.
Comments must refer to Docket No.
RM13–15–000, and must include the
commenter’s name, the organization
they represent, if applicable, and their
address in their comments.
105. The Commission encourages
comments to be filed electronically via
the eFiling link on the Commission’s
Web site at http://www.ferc.gov. The
Commission accepts most standard
word processing formats. Documents
created electronically using word
processing software should be filed in
native applications or print-to-PDF
format and not in a scanned format.
Commenters filing electronically do not
need to make a paper filing.
106. Commenters that are not able to
file comments electronically must send
an original of their comments to:
Federal Energy Regulatory Commission,
Secretary of the Commission, 888 First
Street NE., Washington, DC 20426.
114 13
115 Id.

PO 00000

CFR 121.201.
n.22.

Frm 00018

Fmt 4702

Sfmt 4702

107. All comments will be placed in
the Commission’s public files and may
be viewed, printed, or downloaded
remotely as described in the Document
Availability section below. Commenters
on this proposal are not required to
serve copies of their comments on other
commenters.
VII. Document Availability
108. In addition to publishing the full
text of this document in the Federal
Register, the Commission provides all
interested persons an opportunity to
view and/or print the contents of this
document via the Internet through the
Commission’s Home Page (http://
www.ferc.gov) and in the Commission’s
Public Reference Room during normal
business hours (8:30 a.m. to 5:00 p.m.
Eastern time) at 888 First Street NE.,
Room 2A, Washington, DC 20426.
109. From the Commission’s Home
Page on the Internet, this information is
available on eLibrary. The full text of
this document is available on eLibrary
in PDF and Microsoft Word format for
viewing, printing, and/or downloading.
To access this document in eLibrary,
type the docket number excluding the
last three digits of this document in the
docket number field.
110. User assistance is available for
eLibrary and the Commission’s Web site
during normal business hours from the
Commission’s Online Support at (202)
502–6652 (toll free at 1–866–208–3676)
or email at ferconlinesupport@ferc.gov,
or the Public Reference Room at (202)
502–8371, TTY (202) 502–8659. Email
the Public Reference Room at
public.referenceroom@ferc.gov.
By direction of the Commission.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2013–28629 Filed 12–4–13; 8:45 am]
BILLING CODE 6717–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–120282–10]
RIN 1545–BJ56

Dividend Equivalents From Sources
Within the United States
Internal Revenue Service (IRS),
Treasury.
ACTION: Withdrawal of notice of
proposed rulemaking, notice of
proposed rulemaking and notice of
public hearing.
AGENCY:

E:\FR\FM\05DEP1.SGM

05DEP1

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules
This document provides
guidance to nonresident alien
individuals and foreign corporations
that hold certain financial products
providing for payments that are
contingent upon or determined by
reference to U.S. source dividend
payments and to withholding agents. It
withdraws proposed regulations under
section 871(m) that were published in
the Federal Register on January 23,
2012 (77 FR 3202). This document also
provides a notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by March 5, 2014.
Requests to speak and outlines of topics
to be discussed at the public hearing
scheduled for April, 11, 2014, at 10
a.m., must be received by March 5,
2014.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–120282–10), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–120282–
10), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal at
http://www.regulations.gov (IRS REG–
120282–10). The public hearing will be
held in the auditorium, beginning at 10
a.m., at the Internal Revenue Service
Building, 1111 Constitution Avenue
NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations, D.
Peter Merkel or Karen Walny at (202)
317–6938 (not a toll-free number);
concerning submission of comments,
the hearing, or to be placed on the
building access list to attend the
hearing, Oluwafunmilayo (Funmi)
Taylor, Publications and Regulations
Branch Specialist, at (202) 317–6901
(not a toll-free number).
SUPPLEMENTARY INFORMATION:

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

SUMMARY:

Paperwork Reduction Act
The collections of information
contained in this notice of proposed
rulemaking have been submitted to the
Office of Management and Budget for
review in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the
collections of information should be
sent to the Office of Management and
Budget, Attn: Desk Office for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by
February 3, 2014. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collections of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
The collections of information in this
notice of proposed rulemaking are in
§§ 1.871–15(j) and (o), and are an
increase in the total annual burden in
the current regulations under §§ 1.1441–
1 through 1.1441–9, 1.1461–1 and
1.1474–1. Under § 1.871–15(o), a broker,
dealer, or short party is required to
provide information relating to a
potential section 871(m) transaction in a
commercially reasonable fashion. The
information may include whether the
transaction is a section 871(m)
transaction, the delta of the transaction,
estimates of dividends, and the amount
of the dividend equivalents. This
information is required to establish
whether a payment is treated as a U.S.
source dividend for purposes of section
871(m). This information will be used
for audit and examination purposes.
The likely respondents are businesses
and other for-profit institutions.
Estimated total annual reporting
burden is 240,000 hours.
Estimated average annual burden per
respondent is 8 hours.
Estimated average burden per
response is 4 minutes.
Estimated number of respondents is
30,000.
Estimated total annual frequency of
responses is 4,000,000.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may

PO 00000

Frm 00019

Fmt 4702

Sfmt 4702

73129

become material in the administration
of any internal revenue law. Generally,
tax returns and return information are
confidential, as required by 26 U.S.C.
6103.
Background
On January 23, 2012, the Federal
Register published temporary
regulations (TD 9572) at 77 FR 3108
(2012 temporary regulations) and a
notice of proposed rulemaking by crossreference to temporary regulations and
notice of public hearing at 77 FR 3202
(2012 proposed regulations, and
together with the 2012 temporary
regulations, 2012 section 871(m)
regulations) under section 871(m) of the
Internal Revenue Code (Code). The 2012
section 871(m) regulations related to
dividend equivalents from sources
within the United States paid to
nonresident alien individuals and
foreign corporations. Corrections to the
2012 temporary regulations were
published on February 6, 2012, and
March 8, 2012, in the Federal Register
at 77 FR 5700 and 77 FR 13969,
respectively. A correcting amendment to
the 2012 temporary regulations was also
published on August 31, 2012, in the
Federal Register at 77 FR 53141. The
Treasury Department and the IRS
received written comments on the 2012
proposed regulations, which are
available at www.regulations.gov. A
public hearing was held on April 27,
2012.
This document withdraws the 2012
proposed regulations and provides new
proposed regulations (2013 proposed
regulations). Based on comments
received on the 2012 proposed
regulations, the Treasury Department
and the IRS believe that the 2013
proposed regulations better identify (1)
when a notional principal contract
(NPC) ‘‘is of a type which does not have
the potential for tax avoidance’’ and (2)
other payments that are dividend
equivalents because they are
substantially similar to specified NPC
payments and substitute dividend
payments.
This preamble discusses section
871(m), describes the 2012 section
871(m) regulations, summarizes the
comments received on the 2012 section
871(m) regulations, and explains the
2013 proposed regulations.
1. Section 871(m)
Congress enacted section 871(m)
(originally designated as section 871(l))
on March 18, 2010, in section 541 of the
Hiring Incentives to Restore
Employment Act (HIRE Act), Public
Law 111–147 (124 Stat. 71). Section
871(m) treats a dividend equivalent as a

E:\FR\FM\05DEP1.SGM

05DEP1

73130

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

dividend from sources within the
United States for purposes of sections
871(a), 881, and 4948(a), and chapters 3
and 4 of subtitle A of the Code. Section
871(m) applies to any dividend
equivalent paid on or after September
14, 2010. Section 871(m)(5) provides
that the term payment includes any
gross amount that is used in computing
any net payment that is transferred to or
from the taxpayer.
Section 871(m)(2) defines a dividend
equivalent as (1) any substitute
dividend made pursuant to a securities
lending or a sale-repurchase transaction
that (directly or indirectly) is contingent
upon or determined by reference to the
payment of a dividend from sources
within the United States, (2) any
payment made pursuant to a specified
NPC that (directly or indirectly) is
contingent upon or determined by
reference to the payment of a dividend
from sources within the United States,
or (3) any other payment that the
Secretary determines is ‘‘substantially
similar’’ to a specified NPC payment or
substitute dividend payment.
Section 871(m)(3) defines the term
specified NPC. For payments made on
or after September 14, 2010, and on or
before March 18, 2012, section
871(m)(3)(A) defines a specified NPC as
any NPC if (1) the long party transferred
the underlying security to the short
party in connection with entering into
the NPC, (2) the short party transferred
the underlying security to the long party
in connection with the termination of
the NPC, (3) the underlying security is
not readily tradable on an established
securities market, (4) the short party
posted the underlying security as
collateral with the long party, or (5) the
NPC is identified by the Secretary as a
specified NPC. For payments made after
March 18, 2012, section 871(m)(3)(B)
provides that any NPC is a specified
NPC unless the Secretary determines
that the NPC is of a type that does not
have the potential for tax avoidance.
2. 2012 Section 871(m) Regulations
The 2012 section 871(m) regulations
provided guidance regarding dividend
equivalents under section 871(m).
Generally, the 2012 section 871(m)
regulations defined the terms specified
NPC and substantially similar payment,
addressed certain issues regarding
withholding of tax with respect to the
payment of a dividend equivalent, and
provided other rules relating to
dividend equivalents.
Section 1.871–15(c) of the 2012
proposed regulations provided that a
dividend equivalent included any gross
amount used to compute any net
amount transferred to or from the

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

taxpayer, even if the taxpayer made a
net payment or no payment was made
because the net amount was zero. A
dividend equivalent, however, did not
include any amount determined by
reference to an estimate of an expected
(but not yet announced) dividend. This
exception did not apply if the estimate
adjusted to reflect the amount of the
actual dividend.
Section 1.871–16 of the 2012 section
871(m) regulations defined the term
specified NPC with respect to payments
made after March 18, 2012. For
payments made prior to January 1, 2014,
the 2012 temporary regulations (as
amended by the correcting amendment
published at 77 FR 53141) defined a
specified NPC using substantially the
same definition as provided in section
871(m)(3)(A). For payments made on or
after January 1, 2014, the 2012 proposed
regulations defined a specified NPC as
an NPC that meets one or more of the
following factors: (1) The long party is
‘‘in the market’’ on the same day that
the parties priced or terminated the
NPC; (2) the underlying security is not
regularly traded on a qualified
exchange; (3) the short party posts the
underlying security as collateral and the
underlying security represents more
than ten percent of the collateral posted
by the short party; (4) the actual term of
the NPC is fewer than 90 days; (5) the
long party controls the short party’s
hedge; (6) the notional principal amount
is greater than five percent of the total
public float of the underlying security or
greater than 20 percent of the 30-day
daily average trading volume; or (7) the
NPC is entered into on or after the
announcement of a special dividend
and prior to the ex-dividend date.
Section 1.871–15(d) of the 2012
proposed regulations described
payments that are substantially similar
to substitute dividends made pursuant
to securities lending and salerepurchase transactions and to
payments made pursuant to specified
NPCs. A substantially similar payment
was any (1) gross-up amount paid by a
short party in satisfaction of the long
party’s tax liability with respect to a
dividend equivalent, or (2) payment
made pursuant to an equity-linked
instrument (ELI) that was calculated by
reference to a dividend from sources
within the United States if the ELI
satisfied one or more of the specified
NPC factors.
The 2012 proposed regulations
provided that certain indices referenced
by an NPC or ELI would not be
underlying securities, and therefore,
would not be subject to section 871(m).
Section 1.871–16(f)(1) of the 2012
proposed regulations provided that each

PO 00000

Frm 00020

Fmt 4702

Sfmt 4702

component security of a customized
index would be treated as an underlying
security in a separate NPC. Section
1.871–16(f)(3) of the 2012 proposed
regulations defined a customized index
as (1) a ‘‘narrow-based index,’’ which
was generally defined based on the
Securities Exchange Act of 1934, section
3(a)(55)(B); or (2) any other index unless
futures contracts or options contracts
referencing the index trade on a
qualified board or exchange.
The 2012 section 871(m) regulations
provided rules under section 1441 to
require a withholding agent to withhold
tax owed with respect to a dividend
equivalent. Many of these amendments
and proposals simply coordinated the
rules in § 1.871–16T of the 2012
temporary regulations and §§ 1.871–15
and 1.871–16 of the 2012 proposed
regulations with the withholding rules
in chapter 3 of the Code. Section
1.1441–3(h)(2) of the 2012 proposed
regulations explained the procedures for
withholding when an NPC became a
specified NPC after the date that the
parties entered into the NPC. The
proposed regulations provided that the
term dividend equivalent included any
payment that was made prior to the date
the NPC became a specified NPC and
that was (directly or indirectly)
contingent upon or determined by
reference to the payment of a dividend
from sources within the United States.
3. Summary of Comments on the 2012
Section 871(m) Regulations
The Treasury Department and the IRS
received numerous comments regarding
the 2012 section 871(m) regulations.
The major concerns raised in the
comments related to (1) the definition of
a specified NPC, (2) the definition of an
ELI, (3) withholding issues that arise
regarding the payment of a dividend
equivalent, (4) the potential for overwithholding in a chain of transactions,
(5) the treatment of indices, and (6) the
effective date of the 2012 proposed
regulations.
A. Definition of Specified NPC
Several comments on the 2012
proposed regulations stated that the
seven-factor approach to defining a
specified NPC would not accurately
identify tax avoidance transactions.
These comments asserted that the
factors could treat a contract as a
specified NPC even when the contract
was not entered into primarily to avoid
withholding. Similarly, comments noted
that some tax-motivated transactions
would not be subject to tax under
section 871(m) because the transaction
would not meet any of the seven factors.
These comments generally

E:\FR\FM\05DEP1.SGM

05DEP1

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules
recommended substantial modification
to the factors used in the 2012 proposed
regulations.
Comments stated that the term of a
contract does not indicate the potential
for tax avoidance. Comments noted that
the term rule could result in retroactive
withholding obligations and that it
would be difficult for withholding
agents to design systems to monitor
withholding obligations that may arise
after a payment has been made. Other
comments asserted that 90 days was not
the appropriate threshold for a
minimum term and suggested
eliminating the 90-day term factor or
reducing the minimum term. Another
comment acknowledged that the length
of the term may indicate that a contract
has a tax avoidance motive; however,
this comment recommended adding an
exception for termination events that are
beyond the control of the parties to the
transaction.
Comments asserted that withholding
agents and taxpayers would have
difficulty applying the ‘‘in the market’’
factor. Those comments recommended
that a long party should be treated as
being ‘‘in the market’’ only when the
long party sold or purchased the
underlying security ‘‘in connection
with’’ entering into or terminating an
NPC. In addition, several comments
indicated that withholding agents
would have difficulty determining
whether a long party was ‘‘in the
market’’ and would have to rely on
representations from the long party to
the withholding agent.

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

B. Definition of ELI
Comments stated that the definition of
specified ELI in the 2012 proposed
regulations was overly broad because
numerous types of ELIs do not give rise
to the policy concerns underlying
section 871(m). The comments
requested that the final regulations limit
the scope of the term ELI to contracts
that provide delta-one or near-delta-one
exposure to the underlying equity. One
comment explained that the delta of an
instrument reflects the change in the
value of the instrument relative to a
change in the value of the underlying
security. These comments asserted that
non-delta-one derivatives do not
provide investors with a substitute for
physical ownership of the underlying
security. One comment, however,
disagreed that a delta-based standard is
the appropriate criteria for ELIs. This
comment stated that a delta-based
standard would provide non-delta-one
financial instruments with a
competitive advantage over delta-one
products because non-delta-one

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

financial instruments would be subject
to more favorable tax treatment.
Another comment suggested that the
term ELI should not include single stock
futures contracts (SSFs) unless the SSF
is an ‘‘exchange future for physical’’
(EFP). That comment described an EFP
as a transaction in which an investor (1)
sold stock and purchased an SSF for
future delivery of the same stock or (2)
purchased stock and sold an SSF to
deliver the same stock in the future. The
comment maintained that an SSF, other
than an EFP, should not be treated as an
ELI because SSFs trade on a regulated
exchange, unlike bilateral over-thecounter contracts. The comment also
asserted that an adjustment to the
settlement price of an SSF is not a
payment upon which withholding may
be applied.
Similarly, several comments
recommended that the final regulations
provide an exception to the term ELI for
exchange-traded options because many
of these options do not provide close
economic substitutes for owning stock.
These comments explained that two of
the seven specified NPC factors will
apply to many standard exchangetraded options. First, the majority of
exchange-traded options have an initial
term of less than 90 days. Second, when
an investor exercises an exchangetraded call option, the investor acquires
the underlying securities because the
terms of the transaction require physical
settlement. If exchange-traded options
continue to be treated as ELIs, these
comments recommended that the final
regulations account for the differences
between over-the-counter and exchangetraded options.
C. Withholding Issues
Comments requested clarification on
how the 2012 proposed regulations
would interact with the withholding
rules of chapter 3. Comments asserted
that the 2012 proposed regulations did
not clearly address whether
intermediaries, custodians, clearing
organizations, and members of clearing
organizations are withholding agents.
Due to the large volume of transactions
cleared by exchanges on a daily basis,
one comment noted that it would be
impractical to treat an exchange as a
withholding agent. Other comments
stated that the 2012 proposed
regulations would impose an undue
burden on broker-dealers with non-U.S.
customers because the broker-dealers
would have to develop complicated
systems to determine whether an
instrument is an ELI and the amount of
any dividend equivalent.
Other comments suggested limiting a
withholding agent’s liability for

PO 00000

Frm 00021

Fmt 4702

Sfmt 4702

73131

withholding tax with respect to
dividend equivalents. Comments stated
that a withholding agent should not be
liable for U.S. tax when the withholding
agent lacks the information necessary to
determine whether a transaction
constitutes a specified NPC. For
instance, comments noted that a
withholding agent may not know
whether a long party is selling or
purchasing underlying securities on the
same day that a specified NPC or ELI is
entered into or terminated. A comment
asserted that withholding for U.S. tax
would be complicated and impractical if
the final regulations do not limit a
withholding agent’s knowledge to the
information available to the withholding
agent at the trading unit level.
Comments also questioned the rule in
§ 1.1441–3(h)(2) of the 2012 proposed
regulations treating all payments as
dividend equivalents if a contract
became a specified NPC only as a result
of the long party acquiring physical
shares upon termination (‘‘crossing
out’’). Comments stated that the 2012
proposed regulations unfairly would
have required a withholding agent to
withhold for U.S. tax on all payments
made pursuant to a contract that would
be treated as dividend equivalents when
the contract only became a specified
NPC because of a ‘‘cross out’’ at the end
of the contract. Other comments
recommended that this rule prescribing
retroactive treatment of a payment as a
dividend equivalent should apply only
to NPCs that are specified NPCs because
they meet the ‘‘in the market’’ or the 90day factor.
D. Chain of Transactions
Several comments stated that a chain
of equity derivatives could result in the
collection of cascading U.S. tax, for
example, when each transaction in a
chain of back-to-back equity derivatives
referencing the same underlying
security is subject to U.S. withholding
tax. Some comments recommended that
the final regulations incorporate
specified NPCs into the qualified
securities lender and credit forward
regimes described in Notice 2010–46,
2010–24 I.R.B. 757, which outlines a
framework for limiting the amount of
U.S. tax withheld in a chain of
securities lending or sale-repurchase
transactions. See § 601.601(d)(2)(ii)(b).
Other comments recommended that
certain transactions be exempt from
section 871(m), such as transactions
entered into by a non-U.S. dealer as a
long party in the ordinary course of
business with customers. Comments
explained that these transactions should
be exempt from section 871(m) because
the non-U.S. dealer does not enter into

E:\FR\FM\05DEP1.SGM

05DEP1

73132

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

the transaction to avoid U.S. tax and
U.S. tax would be paid on any dividend
equivalent paid to the customers of the
non-U.S. dealer.

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

E. Indices
Comments recommended several
changes to the definition of the terms
narrow-based index and customized
index. One comment questioned the
definition of narrow-based index and
suggested that the final regulations
incorporate the exceptions to that term
provided in section 3(a)(55) of the
Securities Exchange Act of 1934.
Several comments suggested changes
that would narrow the scope of the term
customized index. For example,
comments suggested that the term
customized index be revised to apply
only to a narrow-based index or any
index offered by a publisher that is not
a ‘‘recognized independent index
publisher.’’ Another comment
recommended that the definition of a
customized index exclude an index if an
exchange-traded fund, exchangedtraded note, or other exchange-traded
derivative tracked that index. One
comment suggested that the final
regulations provide that a customized
index does not include any index with
respect to which U.S. equity securities
comprise less than 20 percent of the
notional value.
Other comments suggested that the
final regulations broaden the definition
of customized index because the
definition in the 2012 proposed
regulation may have permitted certain
transactions designed to avoid U.S. tax.
For example, one comment suggested
that a customized index should include
any index that uses dividend yield as
the primary criteria for inclusion in the
index. Another comment noted that a
partnership may function in the same
manner as a customized index if the
partnership was formed to hold a small
basket of U.S. securities.
F. Effective Dates
The 2012 proposed regulations
provided that the rules would apply to
payments made on or after the date of
publication of the Treasury decision
adopting those rules as final regulations.
Comments expressed concern about the
potentially retroactive effect of the
regulations. With respect to ELIs,
comments recommended that the final
regulations should apply only to those
transactions entered into after the
effective date (rather than payments
made after the effective date) because
taxpayers and withholding agents did
not foresee that these contracts would
be subject to U.S. tax. Comments also
recommended that the effective date of

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

the final regulations be delayed because
market participants will be required to
make systems modifications and
operational adjustments to comply with
the final regulations.
4. Explanation of Provisions
After consideration of the comments,
the Treasury Department and the IRS
agree that the proposed seven-factor
approach to identify a specified NPC
does not provide the best framework for
evaluating whether an NPC ‘‘is of a type
which does not have the potential for
tax avoidance’’ and that the seven-factor
approach would be difficult to
administer, both for the IRS and
withholding agents. Accordingly, the
Treasury Department and the IRS are
withdrawing the 2012 proposed
regulations and proposing new
regulations based on the objective
measurement of a derivative’s delta to
determine whether a contract is subject
to tax under section 871(m). The delta
of an NPC or ELI is the ratio of the
change in the fair market value of the
contract to the change in the fair market
value of the property referenced by the
contract. This approach is consistent
with comments suggesting that the delta
of an option be used to determine
whether the option is a specified ELI.
The Treasury Department and the IRS
believe that this delta-based standard
will prevent taxpayers from avoiding
withholding tax by electing derivative
exposure to U.S. equities rather than
physical ownership.
A transaction has the ‘‘potential for
tax avoidance’’ if it approximates the
economics of owning an underlying
security without incurring the tax
liability associated with owning that
security. In many cases, a long party is
indifferent as to whether to invest in a
derivative or a physical position
because the derivative and the physical
position provide comparable economic
returns. Furthermore, the short party
will often hedge an NPC or ELI by
acquiring physical securities in
proportion to the delta of the derivative
to which it is exposed. When dividends
paid on physical securities are subject to
tax while dividend equivalents with
respect to economically comparable
derivatives are not, those derivatives
have a potential for tax avoidance
regardless of whether a long party is
using the derivative in a particular case
to avoid tax. Accordingly, the Treasury
Department and the IRS favor a delta
approach that objectively identifies
transactions in which the long party is
able to sufficiently approximate the
economic returns associated with an
underlying security.

PO 00000

Frm 00022

Fmt 4702

Sfmt 4702

In addition, the Treasury Department
and the IRS believe that the delta-based
standard of the 2013 proposed
regulations provides a simpler and more
administrable framework than the
seven-factor test of the 2012 proposed
regulations. Using the delta of an NPC
or ELI to determine the application of
section 871(m) employs a single
standard for NPCs and ELIs, although
the regulations have different
applicability dates for specified NPCs
and specified ELIs. Therefore, for both
equity swaps and other equity
derivatives, the determination of
whether a transaction may give rise to
a dividend equivalent will generally
depend only on the determination of a
single objective measurement at the
time the transaction is acquired.
This notice of proposed rulemaking
should not be construed as providing
guidance with respect to any other
section of the Code. For example, this
notice should not be used as a basis for
applying the delta standard to interpret
other Code sections.
A. In General
Section 1.871–15(b) of the 2013
proposed regulations treats a dividend
equivalent as a dividend from sources
within the United States for purposes of
sections 871(a), 881, 892, 894, and
4948(a), and chapters 3 and 4 of subtitle
A of the Code. Section 1.871–15(c)
provides that a dividend equivalent is
(1) any payment of a substitute dividend
made pursuant to a securities lending or
sale-repurchase transaction that
references a U.S. source dividend
payment, (2) any payment made
pursuant to a specified NPC that
references a U.S. source dividend
payment, (3) any payment made
pursuant to a specified ELI that
references a U.S. source dividend
payment, or (4) any other substantially
similar payment. A payment references
a U.S. source dividend payment if the
payment is directly or indirectly
contingent upon or determined by
reference to the payment of a dividend
from sources within the United States.
Certain transactions typically provide
for dividend equivalents to be paid at
the time a dividend is paid, and in an
amount equal to that dividend payment,
on a referenced stock. Stock loans,
equity sale-repurchase transactions, and
total return swaps referencing stock are
the most common types of equity-linked
transactions that provide the long party
with either a dividend or a dividend
equivalent equal to the dividend paid
on the referenced stock.
Other transactions that are linked to
U.S. equities may also provide for
dividend equivalents. The Treasury

E:\FR\FM\05DEP1.SGM

05DEP1

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules
Department and the IRS believe that an
ELI that has economic terms that are
substantially similar to a payment made
pursuant to a securities lending or salerepurchase transaction, or a specified
NPC, creates the same potential for
avoidance of U.S. withholding tax as
those transactions. Section 1.871–
15(a)(4) of the 2013 proposed
regulations defines an ELI as any
financial transaction (other than a
securities lending or sale-repurchase
transaction or an NPC) that references
the value of one or more underlying
securities. The term ELI includes
instruments such as forward contracts,
futures contracts, options, debt
instruments convertible into underlying
securities, and debt instruments with
payments linked to underlying
securities. The long party with respect
to an ELI is the counterparty that holds
a long position with respect to an
underlying security, such as the
purchaser of a call option or the writer
of a put option.
Section 1.871–15(f) of the 2013
proposed regulations provides that
another substantially similar payment is
a gross-up amount paid by a short party
in satisfaction of the long party’s tax
liability with respect to a dividend
equivalent. The Treasury Department
and the IRS request comments regarding
whether other payments should be
treated as substantially similar
payments, such as a payment made by
a seller of stock to the purchaser of the
stock pursuant to an agreement to
deliver a pending U.S. source dividend
after the record date (for example, a due
bill).
The definition of an underlying
security has also been revised. The 2013
proposed regulations define an
underlying security as any interest in an
entity taxable as a corporation for
Federal tax purposes if a payment with
respect to that interest may give rise to
a U.S. source dividend. If a transaction
references more than one such entity
(including a reference to an index that
is not a qualified index), each interest is
treated as a separate underlying
security. If a transaction references a
qualified index, the qualified index is
treated as a single security that is not an
underlying security.
The 2013 proposed regulations also
revise the rules pertaining to indices. In
general, a qualified index is any index
that (1) references 25 or more
underlying securities; (2) references
only long positions in underlying
securities; (3) contains no underlying
security that represents more than 10
percent of the index’s weighting; (4)
rebalances based on objective rules at
set intervals; (5) does not provide for a

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

high dividend yield; and (6) is
referenced by futures or option contracts
that trade on a national securities
exchange or a domestic board of trade.
B. Section 871(m) Transactions and
Delta
The 2013 proposed regulations define
a section 871(m) transaction as any
securities lending or sale-repurchase
transaction, specified NPC, or specified
ELI. Section 1.871–15(a)(10) of the 2013
proposed regulations defines a
securities lending transaction and salerepurchase transaction by reference to
§ 1.861–3(a)(6) and includes
substantially similar transactions.
As noted above, to determine whether
a transaction is a specified NPC or
specified ELI, the 2013 proposed
regulations replace the seven-factor test
in the 2012 proposed regulations with a
single-factor test. Section 1.871–15(d)(2)
provides that, with respect to payments
made on or after January 1, 2016, a
specified NPC is any NPC that has a
delta of 0.70 or greater when the long
party acquires the transaction.
Similarly, § 1.871–15(e) provides that a
specified ELI is any ELI that has a delta
of 0.70 or greater when the long party
acquires the transaction. If a transaction
references more than one underlying
security, the taxpayer must determine
whether the transaction is a section
871(m) transaction with respect to each
underlying security. A transaction,
therefore, may be a section 871(m)
transaction with respect to one or more
underlying securities referenced in the
transaction, but may not be treated as a
section 871(m) transaction with respect
to other underlying securities referenced
by that same transaction.
Section 1.871–15(g)(1) of the 2013
proposed regulations provides that the
delta of an NPC or an ELI is the ratio
of the change in the fair market value of
the NPC or ELI to the change in the fair
market value of the property referenced
by the NPC or ELI. For purposes of the
2013 proposed regulations, the delta of
a transaction must be determined in a
commercially reasonable manner. If a
taxpayer calculates delta for non-tax
business purposes, that delta ordinarily
is treated as the delta for purposes of
this section. For example, to determine
whether an option is a specified ELI, a
dealer may use the delta that it
calculates to determine the number of
shares needed to balance its position on
the option (even though that number of
shares may not correspond to the
dealer’s actual hedge). If an NPC or ELI
contains more than one reference to a
single underlying security, all references
to that underlying security are taken
into account in determining the delta. If

PO 00000

Frm 00023

Fmt 4702

Sfmt 4702

73133

an NPC or an ELI references more than
one underlying security or other
property or liability, a separate delta
must be determined with respect to each
underlying security without taking into
account any other underlying security
or other property or liability referenced
in the transaction. Section 1.871–
15(g)(2) provides that if the delta of an
NPC or ELI is not reasonably expected
to vary during the term of the
transaction, the NPC or ELI has a
constant delta and the delta is treated as
1.0. If a transaction would not have a
delta of 1.0 but for the rule in § 1.871–
15(g)(2), the number of shares of the
underlying security is adjusted to reflect
the constant delta of 1.0. This rule is
intended to prevent taxpayers from
avoiding the application of the 2013
proposed regulations by using
transactions that reduce delta while
retaining the economics of owning a set
amount of shares. For example, a
transaction that provides 50 percent of
the appreciation, dividends, and
depreciation on 200 shares of stock X
throughout the term of the transaction
(and therefore has a delta of 0.5) will be
treated as a contract that provides 100
percent of the same exposure on 100
shares of stock X (and therefore has a
delta of 1.0). The Treasury Department
and the IRS request comments regarding
whether taxpayers could avoid the
constant delta rule by structuring
transactions with the potential for de
minimis delta variability and whether
such transactions should be deemed to
have a constant delta.
The Treasury Department and the IRS
understand that a long party may enter
into multiple transactions referencing
the same underlying security to
substantially replicate the economics of
owning the underlying security. For
example, a taxpayer may purchase a call
option and sell a put option referencing
the same underlying security that
individually have a delta below 0.70 but
together have a delta that exceeds 0.70.
If section 871(m) were to apply to each
transaction separately, neither
transaction would be a section 871(m)
transaction even though the economics
of the positions when considered
together are the same as another
transaction that would be a section
871(m) transaction. Therefore, § 1.871–
15(l) of the 2013 proposed regulations
treats multiple transactions as a single
transaction for purposes of determining
if the transactions are a section 871(m)
transaction with respect to an
underlying security when a long party
(or a related person) enters into two or
more transactions that reference the
same underlying security and the

E:\FR\FM\05DEP1.SGM

05DEP1

73134

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

transactions were entered into in
connection with each other. These rules
apply only to combine transactions in
which the taxpayer is the long party.
Section 1.871–15(l) does not combine
transactions when a taxpayer is the long
party with respect to an underlying
security in one transaction and the short
party with respect to the same
underlying security in another
transaction. Transactions that are
combined for purposes of determining
whether there is a section 871(m)
transaction are treated as separate
transactions for all other purposes of
this section, including for purposes of
determining the amount of a dividend
equivalent with respect to each
transaction. A withholding agent,
however, is not required to withhold on
a dividend equivalent paid pursuant to
a transaction that has been combined
with one or more other transactions
unless the withholding agent knows that
the long party (or a related person)
entered into the potential section
871(m) transactions in connection with
each other.
The Treasury Department and the IRS
request comments regarding whether
(and, if applicable, how) the rules for
combining separate transactions to
determine whether the transactions are
section 871(m) transactions should
apply in other situations, such as when
a taxpayer holds both long and short
positions with respect to the same
underlying security. Comments also are
requested regarding whether (and, if
applicable, how) the remaining
transaction (or transactions) should be
retested when a long party terminates
one or more, but not all, of the
transactions that make up a combined
position.
C. Amount of Dividend Equivalent
Section 1.871–15(h) of the 2013
proposed regulations provides rules for
identifying a payment of a dividend
equivalent. A payment includes any
gross amount that references a U.S.
source dividend and that is used to
compute any net amount transferred to
or from the long party even if the long
party makes a net payment to the short
party or the net payment is zero. For
purposes of section 871(m), a payment
is treated as made on the date the
amount of the dividend equivalent is
fixed even if it is paid or otherwise
taken into account on a later date.
The 2012 proposed regulations
provided that estimates of expected
dividends were not dividend
equivalents unless the estimate was
adjusted to reflect actual dividend
payments. The 2013 proposed
regulations eliminate this exception and

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

explicitly treat estimated dividend
payments as dividend equivalents
because the economic benefit of a
dividend is present in contracts that use
estimated dividends in much the same
way as a contract that adjusts for actual
dividends. Moreover, the Treasury
Department and the IRS are concerned
that taxpayers may inappropriately
avoid section 871(m) if estimated
dividends are not treated as dividend
equivalents.
In the 2013 proposed regulations, a
dividend equivalent includes any
amount that references the payment of
a U.S. source dividend. In addition to an
actual payment of dividends and an
estimated payment of dividends, a
dividend equivalent includes any other
contractual term of a potential section
871(m) transaction that is calculated
based on an actual or estimated
dividend. For example, when a long
party enters into an NPC that provides
for payments based on the appreciation
in the value of an underlying security
but does not explicitly entitle the long
party to receive payments based on
regular dividends (a price return swap),
the 2013 proposed regulations treat the
price return swap as a transaction that
provides for the payment of a dividend
equivalent because the anticipated
dividend payments are presumed to be
taken into account in determining other
terms of the NPC, such as in the
payments that the long party is required
to make to the short party or in setting
the price of the underlying securities
referenced in the price return swap.
The 2013 proposed regulations also
provide rules for calculating the amount
of a dividend equivalent. For a
securities lending or sale-repurchase
transaction, § 1.871–15(i) provides that
the amount of a dividend equivalent for
each underlying security equals the
actual per share dividend amount paid
on the underlying security multiplied
by the number of shares of the
underlying security transferred pursuant
to the transaction. For a specified NPC
or specified ELI, the amount of a
dividend equivalent equals the per
share dividend amount with respect to
the underlying security multiplied by
the number of shares of the underlying
security referenced in the contract
(subject to adjustment) multiplied by
the delta of the transaction with respect
to the underlying security at the time
that the amount of the dividend
equivalent is determined.
If a transaction provides for a
payment based on an estimated
dividend (including an implicit
estimated dividend), § 1.871–15(h)(2)(i)
and (iii) of the 2013 proposed
regulations require that the actual

PO 00000

Frm 00024

Fmt 4702

Sfmt 4702

amount of the dividend payment is used
to calculate the amount of the dividend
equivalent unless the short party
identifies a reasonable estimated
dividend amount in writing at the
inception of the transaction. Prop.
Treas. Reg. § 1.871–15(h)(2)(i) and (iii).
If a transaction that provides for
payment based on estimated dividends
is supported by the required
documentation, the per share dividend
amount used to compute the amount of
a dividend equivalent is the lesser of the
amount of the estimated dividend and
the amount of the actual dividend paid.
The delta used to determine whether
a potential section 871(m) transaction is
a section 871(m) transaction may differ
from the delta used to determine the
amount of the dividend equivalent of a
section 871(m) transaction. Whereas the
delta of a transaction at the time the
long party acquires a potential section
871(m) transaction is used to determine
whether the transaction is a section
871(m) transaction, the delta of the
section 871(m) transaction at the time
that the amount of the dividend
equivalent is determined is used to
calculate the amount of the dividend
equivalent. Because the delta of a
transaction may vary over time, the
delta of the transaction at the time of
acquisition may differ from the delta of
the transaction at the time the amount
of the dividend equivalent is
determined. Under § 1.871–
15(i)(1)(ii)(C)(1) of the 2013 proposed
regulations, the delta used to calculate
the amount of a dividend equivalent is
not used to re-test whether a transaction
is a section 871(m) transaction; a long
party’s section 871(m) transaction
continues to be subject to tax even if the
delta of the section 871(m) transaction
is below 0.70 at the time the amount of
the dividend equivalent is determined.
Similarly, a long party that acquires a
potential section 871(m) transaction that
has a delta below 0.70 at the time of
acquisition will not have a section
871(m) transaction even if the delta
increases to be above 0.70 during the
time the long party holds the
transaction.
Under the 2013 proposed regulations,
the amount of the dividend equivalent
generally is determined on the earlier of
the ex-dividend date or the record date
for the dividend. However, if a section
871(m) transaction has a term of one
year or less, the amount of the dividend
equivalent is determined when the long
party disposes of the transaction.
Therefore, a long party that acquires an
option with a term of one year or less
that is a specified ELI will not incur a
withholding tax if the option lapses.

E:\FR\FM\05DEP1.SGM

05DEP1

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules
D. Other Rules
In response to comments, § 1.871–
15(j) of the 2013 proposed regulations
provides exceptions to the definition of
a section 871(m) transaction for two
types of potential section 871(m)
transactions that have little potential for
tax avoidance. The first exception
applies when a qualified dealer enters
into a transaction as the long party in its
capacity as a dealer. A qualified dealer
is any dealer in securities within the
meaning of section 475 that is subject to
regulatory supervision by a
governmental authority in the
jurisdiction in which it was created or
organized. In addition, the dealer must
certify to the short party that it is a
qualified dealer acting in its capacity as
a dealer in securities and that it will
withhold and deposit any tax imposed
by section 871(m) with respect to a
section 871(m) transaction that it enters
into as a short party in its capacity as
a dealer. The second exception applies
when a taxpayer enters into a
transaction as part of a plan pursuant to
which one or more persons (including
the taxpayer) are obligated to acquire 50
percent or more of the entity issuing the
underlying securities.
A comment to the 2012 proposed
regulations stated that an NPC may
reference a partnership interest and that
the partnership could be formed to hold
a small basket of U.S. equity securities.
Noting that a partnership may function
like a customized index, the comment
recommended that regulations treat an
NPC that references a partnership
interest as a separate NPC with respect
to each underlying security held by the
partnership. To address the concern
noted in the comment, § 1.871–15(m) of
the 2013 proposed regulations treats a
transaction that references an interest in
an entity that is not a C corporation for
Federal tax purposes as referencing the
allocable portion of any underlying
securities and potential section 871(m)
contracts held directly or indirectly by
that entity. The 2013 proposed
regulations provide an exception for a
transaction that references an interest in
an entity that is not a C corporation if
underlying securities and potential
section 871(m) transactions represent, in
the aggregate, 10 percent or less of the
value of the interest in the referenced
entity at the time the transaction is
entered into.
Section 1.871–15(n) of the 2013
proposed regulations provides that the
Commissioner may treat any payment
made with respect to a transaction as a
dividend equivalent if the taxpayer
acquires a transaction with a principal
purpose of avoiding the application of

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

these rules. The Treasury Department
and the IRS will continue to closely
scrutinize other transactions that are not
covered by section 871(m) and that may
be used to avoid U.S. taxation and U.S.
withholding. In addition, the IRS may
challenge the U.S. tax results claimed in
connection with transactions that are
designed to avoid the application of
section 871(m) using all available
statutory provisions and judicial
doctrines (including the substance over
form doctrine, the economic substance
doctrine under section 7701(o), the step
transaction doctrine, and tax ownership
principles) as appropriate. For example,
nothing in section 871(m) precludes the
IRS from asserting that a contract
labeled as an NPC or other equity
derivative is in fact an ownership
interest in the equity referenced in the
contract.
The 2013 proposed regulations also
make a number of conforming changes
to reporting and withholding
requirements. Most equity-linked
transactions involve a financial
institution acting as a broker, dealer, or
intermediary. A financial institution is
usually in the best position to undertake
the responsibility to report the tax
consequences of a potential section
871(m) transaction. Accordingly,
§ 1.871–15(o) of the 2013 proposed
regulations provides that when a broker
or dealer is a party to a potential section
871(m) transaction, the broker or dealer
is required to determine whether the
transaction is a section 871(m)
transaction, and if so, the amounts of
the dividend equivalents. If a broker or
dealer is not a party to the transaction
or both parties are brokers or dealers,
the short party must determine whether
the transaction is a section 871(m)
transaction and the amounts of the
dividend equivalents. Determinations
made by the broker, dealer, or short
party are binding on the parties to the
section 871(m) transaction unless the
other person knows or has reason to
know that the information is incorrect;
the determinations are not binding on
the IRS. In addition, certain persons
described in § 1.871–15(o)(3)(ii) of the
2013 proposed regulations are permitted
to request information from certain
parties to a potential section 871(m)
transaction who are described in
§ 1.871–15(o)(1) when the information is
necessary to satisfy their withholding or
information reporting obligations, or to
determine their tax liability. If a
withholding agent reasonably relies on
information received, it will not be
liable for underwithholding; however,
the party to the transaction who failed
to properly determine the amount will

PO 00000

Frm 00025

Fmt 4702

Sfmt 4702

73135

be liable for the underwithholding. The
Treasury Department and the IRS solicit
comments with respect to these
reporting rules, including comments
regarding the parties that should be
required to report and the extent of
information that is appropriate.
The 2013 proposed regulations
include amendments to chapter 3
specifically addressing dividend
equivalents. The 2013 proposed
regulations describe how the exception
to withholding where no money or
property is paid applies to a dividend
equivalent. Section 1.1441–2(d)(5) of the
2013 proposed regulations provides that
a withholding agent is not obligated to
withhold on a dividend equivalent until
the later of: (1) The time that the amount
of the dividend equivalent is
determined and (2) the time at which
any of the following to has occurred: (a)
Money or other property is paid
pursuant to a section 871(m)
transaction, (b) the withholding agent
has custody or control of money or other
property of the long party at any time
on or after the amount of the dividend
equivalent is determined, or (c) there is
an upfront payment or a prepayment of
the purchase price. Although § 1.1441–
2(d)(5) of the 2013 proposed regulations
relieves a withholding agent of liability
to withhold when the withholding agent
does not have control of money or other
property of the long party, the long
party remains liable for U.S. tax on the
dividend equivalent pursuant to section
871(m) and Prop. Treas. Reg. § 1.871–15.
E. Certain Contingent Interest
Generally, section 871(h)(4) provides
that U.S. source portfolio interest
received by a nonresident alien
individual is not subject to the 30percent U.S. tax imposed under section
871(a)(1). Certain contingent interest
payments, however, are excluded from
the definition of portfolio interest.
Section 871(h)(4)(A)(ii) grants the
Secretary authority to impose tax on
contingent interest when necessary to
prevent the avoidance of Federal
income tax. Most contingent debt
instruments are either referenced to a
qualified index, have an embedded
option with a delta below 0.7, or both.
A debt obligation that is a specified ELI
and provides for a contingent interest
payment determined by reference to a
U.S. source dividend payment has the
potential to be used by a nonresident
alien individual or foreign corporation
to avoid section 871(m). Therefore,
§ 1.871–14(h) of the 2013 proposed
regulations provide that any contingent
interest will not qualify for the portfolio
interest exemption to the extent that the

E:\FR\FM\05DEP1.SGM

05DEP1

73136

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

contingent interest payment is a
dividend equivalent.
F. Effective/Applicability Date
The 2013 proposed regulations
generally will apply to payments made
on or after the date of publication of the
Treasury decision adopting these rules
as final regulations. Certain provisions
in the 2013 proposed regulations,
however, apply at different dates. For
example, the definition of a specified
NPC in the 2013 proposed regulations
will apply to payments made pursuant
to a specified NPC on or after January
1, 2016. For payments made before
January 1, 2016, the definition of a
specified NPC is provided in section
871(m)(3)(A), § 1.871–16T(b) of the 2012
temporary regulations, and § 1.871–
15(d)(1) of the final regulations in the
Rules and Regulations section of this
issue of the Federal Register. For
specified ELIs, the rules of the 2013
proposed regulations will apply to
payments made on or after January 1,
2016, but only with respect to an ELI
that was acquired by the long party on
or after March 5, 2014.

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations. It is hereby certified that
these regulations will not have a
significant economic impact on a
substantial number of small entities.
This certification is based on the fact
that these regulations will primarily
affect multinational financial
institutions, which tend to be larger
businesses, and foreign entities.
Moreover the number of taxpayers
affected and the average burden are
minimal. Therefore, a Regulatory
Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Code,
these regulations have been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written comments (a signed original and
eight (8) copies) or electronic comments
that are submitted timely to the IRS. The
Treasury Department and the IRS

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

request comments on the clarity of the
proposed rules and how they can be
made easier to understand. All
comments will be available for public
inspection and copying.
A public hearing has been scheduled
for April 11, 2013, beginning at 10 a.m.
in the auditorium of the Internal
Revenue Service Building, 1111
Constitution Avenue NW., Washington,
DC. Due to building security
procedures, visitors must enter at the
Constitution Avenue entrance. All
visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this
preamble. The rules of § 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit electronic or written
comments by March 5, 2014 and an
outline of the topics to be discussed and
the time to be devoted to each topic by
March 5, 2014. A period of 10 minutes
will be allotted to each person for
making comments. An agenda showing
the schedule of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the
agenda will be available free of charge
at the hearing.

PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *
§ 1.871–14(h) also issued under 26 U.S.C.
871(h) and 871(m). * * *
§ 1.871–15 also issued under 26 U.S.C.
871(m). * * *

Par. 2. Section 1.871–14 is amended
by:
■ 1. Redesignating paragraphs (h) and (i)
as paragraphs (i) and (j), respectively.
■ 2. Adding new paragraphs (h) and
(j)(3).
The additions read as follows:
■

§ 1.871–14 Rules relating to repeal of tax
on interest of nonresident alien individuals
and foreign corporations received from
certain portfolio debt investments.

List of Subjects in 26 CFR Part 1

*
*
*
*
(h) Portfolio interest not to include
certain contingent interest—(1)
Dividend equivalents. Contingent
interest does not qualify as portfolio
interest to the extent that the interest is
a dividend equivalent within the
meaning of section 871(m).
(2) Amount of dividend equivalent
that is not portfolio interest. The
amount that does not qualify as
portfolio interest because it is a
dividend equivalent equals the amount
of the dividend equivalent determined
pursuant to § 1.871–15(i). Unless
otherwise excluded pursuant to section
871(h), any other interest paid on an
obligation that is not a dividend
equivalent may qualify as portfolio
interest.
*
*
*
*
*
(j) * * *
(3) Effective/applicability date. The
rules of paragraph (h) of this section
apply to payments made on or after the
date of publication of the Treasury
decision adopting these rules as final
regulations in the Federal Register.
■ Par. 3. Section 1.871–15 is added to
read as follows:

Income taxes, Reporting and
recordkeeping requirements.

§ 1.871–15 Treatment of dividend
equivalents.

Drafting Information
The principal authors of these
regulations are D. Peter Merkel and
Karen Walny of the Office of Associate
Chief Counsel (International). Other
personnel from the Treasury
Department and the IRS also
participated in the development of these
regulations.

Withdrawal of Proposed Regulations
Accordingly, under the authority of
26 U.S.C. 7805, the notice of proposed
rulemaking (REG–120282–10) that was
published in the Federal Register on
Monday, January 23, 2012, (77 FR 3202)
is withdrawn.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is
proposed to be amended as follows:

PO 00000

Frm 00026

Fmt 4702

Sfmt 4702

*

(a) Definitions. For purposes of this
section, the following terms have the
meanings described in this paragraph
(a).
(1) Acquire. To acquire means to enter
into, purchase, accept by transfer, by
exchange, or by conversion, or
otherwise acquire a potential section
871(m) transaction.
(2) Dealer. A dealer is a dealer in
securities within the meaning of section
475(c)(1).
(3) Dividend. A dividend means a
dividend as described in section 316.

E:\FR\FM\05DEP1.SGM

05DEP1

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

(4) Equity-linked instrument. An
equity-linked instrument (ELI) is a
financial transaction, other than a
securities lending or sale-repurchase
transaction or an NPC, that references
the value of one or more underlying
securities. For example, a futures
contract, forward contract, option, debt
instrument, or other contractual
arrangement that references the value of
one or more underlying securities is an
ELI.
(5) Notional principal contract. A
notional principal contract (NPC) is a
notional principal contract as defined in
§ 1.446–3(c).
(6) Option. An option includes an
option embedded in any debt
instrument, forward contract, NPC, or
other potential section 871(m)
transaction.
(7) Parties to a transaction—(i) Long
party. A long party is the party to a
potential section 871(m) transaction
with respect to an underlying security
that is entitled to a dividend equivalent
described in paragraph (c) of this
section.
(ii) Short party. A short party is the
party to a potential section 871(m)
transaction with respect to an
underlying security that is liable for a
dividend equivalent described in
paragraph (c) of this section.
(iii) Party to a transaction. A party to
a transaction is any person that is a long
party or a short party to a potential
section 871(m) transaction.
(iv) Party to a transaction that is both
a long party and a short party—(A) In
general. If a potential section 871(m)
transaction references more than one
underlying security, the long party and
short party are determined separately
with respect to each underlying
security. A party to a potential section
871(m) transaction is both a long party
and a short party when the potential
section 871(m) transaction entitles the
party to receive a payment that
references a dividend payment on an
underlying security and obligates the
same party to make a payment that
references a dividend payment on
another underlying security.
(B) Example. The following example
illustrates the definitions in paragraph
(a)(7) of this section:
Example. (i) Stock X and stock Y are
underlying securities within the meaning of
paragraph (a)(11) of this section.
Corporations A and B enter into an NPC. The
NPC entitles A to receive payments from B
based on any appreciation in the value of
Stock X and dividends paid on Stock X
during the term of the contract and obligates
A to make payments to B based on any
depreciation in the value of Stock X during
the term of the contract. In return, the NPC

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

entitles B to receive payments from A based
on any appreciation in the value of Stock Y
and dividends paid on Stock Y during the
term of the contract and obligates B to make
payments to A based on any depreciation in
the value of Stock Y during the term of the
contract.
(ii) A is the long party with respect to
dividend equivalents it receives based on
Stock X. A is the short party with respect to
dividend equivalents it makes based on Stock
Y. B is the long party with respect to divided
equivalents it receives based on Stock Y. B
is the short party with respect to dividend
equivalents it makes based on Stock X.

(8) Reference. Reference means to be
contingent upon or determined by
reference to, directly or indirectly,
whether in whole or in part.
(9) Section 871(m) transaction. A
section 871(m) transaction is any
securities lending or sale-repurchase
transaction, specified NPC, or specified
ELI. A potential section 871(m)
transaction is any securities lending or
sale-repurchase transaction, NPC, or ELI
that references one or more underlying
securities.
(10) Securities lending or salerepurchase transaction. A securities
lending or sale-repurchase transaction
is any securities lending transaction,
sale-repurchase transaction, or
substantially similar transaction.
Securities lending transaction and salerepurchase transaction have the same
meaning as provided in § 1.861–3(a)(6).
(11) Underlying security. An
underlying security is any interest in an
entity taxable as a C corporation (within
the meaning of section 1361(a)(2)) if a
payment with respect to that interest
could give rise to a U.S. source dividend
pursuant to § 1.861–3. If a potential
section 871(m) transaction references an
interest in more than one entity
described in the preceding sentence
(including a reference to an index that
is not a qualified index described in
paragraph (k) of this section) or different
interests in the same entity, each
referenced interest is a separate
underlying security for purposes of
applying the rules of this section.
(b) Source of a dividend equivalent. A
dividend equivalent is treated as a
dividend from sources within the
United States for purposes of sections
871(a), 881, 892, 894, and 4948(a), and
chapters 3 and 4 of subtitle A of the
Code.
(c) Dividend equivalent—(1) In
general. Except as provided in
paragraph (2), dividend equivalent
means—
(i) Any payment (as described in
paragraph (h) of this section) pursuant
to a securities lending or salerepurchase transaction that references

PO 00000

Frm 00027

Fmt 4702

Sfmt 4702

73137

the payment of a dividend from an
underlying security;
(ii) Any payment (as described in
paragraph (h) of this section) pursuant
to a specified NPC described in
paragraph (d) of this section (specified
NPC) that references the payment of a
dividend from an underlying security;
(iii) Any payment (as described in
paragraph (h) of this section) pursuant
to a specified ELI described in
paragraph (e) of this section (specified
ELI) that references the payment of a
dividend from an underlying security;
and
(iv) Any other substantially similar
payment as described in paragraph (f) of
this section.
(2) Exceptions—(i) Not a dividend. A
payment pursuant to a section 871(m)
transaction that references a distribution
with respect to an underlying security is
not a dividend equivalent to the extent
that the distribution would not be
subject to tax pursuant to sections 871
or 881, or withholding under chapters 3
or 4, if the long party owned the
underlying security referenced by the
section 871(m) transaction. For
example, if a specified NPC references
stock in a regulated investment
company that pays a capital gains
dividend described in section
852(b)(3)(C) that would not be subject to
withholding tax if paid directly to the
long party, then an NPC payment
determined by reference to the capital
gains dividend is not a dividend
equivalent.
(ii) Section 305 coordination. A
payment pursuant to a section 871(m)
transaction is not a dividend equivalent
to the extent that the payment is treated
as a distribution taxable as a dividend
pursuant to section 305.
(d) Specified NPCs—(1) [Reserved]
(2) Specified NPC on or after January
1, 2016. With respect to payments made
on or after January 1, 2016, a specified
NPC is any NPC that has a delta of 0.70
or greater with respect to an underlying
security at the time that the long party
acquires the NPC. If an NPC references
more than one underlying security, the
NPC is a specified NPC only with
respect to underlying securities for
which the NPC has a delta of 0.70 or
greater at the time that the long party
acquires the NPC. For example, if an
NPC references underlying security A
and underlying security B, and it has a
delta of 1.0 with respect to A and 1.0
with respect to B, the NPC is a specified
NPC with respect to A and B.
(e) Specified ELIs. With respect to
payments made on or after January 1,
2016, a specified ELI is any ELI acquired
by the long party on or after March 5,
2014 that has a delta of 0.70 or greater

E:\FR\FM\05DEP1.SGM

05DEP1

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

73138

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

with respect to an underlying security at
the time that the long party acquires the
ELI. If an ELI references more than one
underlying security, the ELI is a
specified ELI only with respect to
underlying securities for which the ELI
has a delta of 0.70 or greater at the time
that the long party acquires the ELI. For
example, if an ELI references underlying
security A and underlying security B,
and it has a delta of 0.90 with respect
to A and 0.30 with respect to B, the ELI
is a specified ELI with respect to A and
is not a specified ELI with respect to B.
(f) Other substantially similar
payments. For purposes of this section,
the following payments are substantially
similar payments:
(1) Payment of a tax liability. Any
payment (as described in paragraph (h)
of this section) in satisfaction of a tax
liability with respect to a dividend
equivalent made by a withholding agent
is a dividend equivalent received by the
long party in an amount determined
under the gross-up formula provided in
§ 1.1441–3(f)(1); and
(2) Due bill. [Reserved].
(g) Delta—(1) Determination of delta.
Delta is the ratio of the change in the fair
market value of an NPC or ELI to the
change in the fair market value of the
property referenced by the NPC or ELI.
If an NPC or ELI contains more than one
reference to a single underlying
security, all references to that
underlying security are taken into
account in determining the delta with
respect to that underlying security. If an
NPC or ELI references more than one
underlying security, a separate delta
must be determined with respect to each
underlying security without taking into
account any other underlying security
or other property or liability. For
purposes of this section, the delta of an
NPC or ELI must be determined in a
commercially reasonable manner. If a
taxpayer calculates delta for non-tax
business purposes, that delta ordinarily
is the delta used for purposes of this
section.
(2) Constant delta. An NPC or ELI is
treated as having a delta of one (1.0)
with respect to an underlying security
when it has a constant delta with
respect to the underlying security at the
time it is acquired by the long party. An
NPC or ELI has a constant delta with
respect to an underlying security if the
NPC or ELI has a delta that is not
reasonably expected to vary during the
term of the transaction with respect to
that underlying security. If a transaction
would not have a delta of one with
respect to an underlying security
without this paragraph, the number of
shares of the underlying security of an
NPC or ELI that has a constant delta is

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

adjusted as described in paragraph
(i)(1)(ii)(B)(2) of this section.
(3) Examples. The following examples
illustrate the rules of paragraph (g) of
this section. For purposes of these
examples, Stock X and Stock Y are
common stock of domestic corporations
X and Y. LP is the long party to the
transaction.
Example 1. The terms of an NPC require
LP to pay the short party an amount equal
to all of the depreciation in the value of 100
shares of Stock X and an interest-rate based
return. In return, the NPC requires the short
party to pay LP an amount equal to all of the
appreciation in the value of 100 shares of
Stock X and any dividends paid by X on
those shares. The value of the NPC will
change by $1 for each $0.01 change in the
price of a share of Stock X. The NPC
therefore has a delta of 1.0 ($1.00/($0.01 ×
100)).
Example 2. LP acquires a call option that
references 100 shares of Stock X. At the time
LP purchases the call option, the value of the
option is expected to change by $0.30 for a
$0.01 change in the price of a share of Stock
X. The call option has a delta of 0.3 ($0.30/
($0.01 × 100)) when LP acquired it.
Example 3. (i) LP acquires an NPC that
entitles LP to receive 50 percent of the
appreciation and dividends on 100 shares of
Stock X in return for the obligation to pay the
short party 50 percent of the depreciation on
100 shares of Stock X and an interest based
return. The value of the NPC is expected to
change by $0.50 for each $0.01 change in the
price of a share of Stock X. The delta is
expected to remain constant during the term
of the transaction.
(ii) Pursuant to the terms of the NPC and
the amount of referenced underlying
securities, the NPC has a delta of 0.5 ($0.50/
($0.01 × 100)) on the date that LP acquired
the transaction. The delta of the NPC,
however, is not expected to vary during the
term of the transaction. Therefore, the NPC
has a constant delta and is treated as having
a delta equal to 1.0 on 50 shares of Stock X
after the adjustments described in § 1.871–
15(i)(1)(ii)(B)(2).

(h) Payment of a dividend
equivalent—(1) Payments determined
on gross basis. For purposes of this
section, a payment includes any gross
amount that references the payment of
a dividend and that is used in
computing any net amount transferred
to or from the long party even if the long
party makes a net payment to the short
party or no payment is made because
the net amount is zero.
(2) Actual and estimated dividends—
(i) In general. A payment includes any
amount that references an actual or
estimated payment of dividends,
whether the reference is explicit or
implicit. If a potential section 871(m)
transaction provides for a payment
based on an estimated dividend that
adjusts to account for the amount of an
actual dividend paid, the payment is

PO 00000

Frm 00028

Fmt 4702

Sfmt 4702

treated as referencing the actual
dividend amount and not an estimated
dividend amount.
(ii) Implicit dividends. A payment
includes an actual or estimated
dividend payment that is implicitly
taken into account in computing one or
more of the terms of a potential section
871(m) transaction, including interest
rate, notional amount, purchase price,
premium, upfront payment, strike price,
or any other amount paid or received
pursuant to the potential section 871(m)
transaction.
(iii) Actual dividend presumption. A
section 871(m) transaction is treated as
paying a per share dividend amount
equal to the actual dividend amount
unless the short party to the section
871(m) transaction identifies a
reasonable estimated dividend amount
in writing at the inception of the
transaction. For this purpose, a
reasonable estimated dividend amount
stated in an offering document or the
documents governing the terms of the
transaction will establish the estimated
dividend amount in writing at the
inception of the transaction. To qualify
as an estimated dividend amount, the
written estimated dividend amount
must separately state the amount
estimated for each anticipated dividend
or state a formula that allows each
dividend to be determined. If a stock is
not expected to pay a dividend, a
reasonable estimate of the dividend
amount may be zero.
(iv) Limitation on estimated
payments. When a section 871(m)
transaction provides for one or more
payments based on estimated dividends
supported by documentation described
in paragraph (h)(2)(iii) of this section,
the per share dividend amount used to
calculate the amount of the dividend
equivalent is the lesser of the estimated
dividend amount and the actual
dividend amount paid on the stock
while the long party was a party to the
section 871(m) transaction. If a section
871(m) transaction provides for any
payment determined by reference to a
dividend in addition to the estimated
dividends (for example, a special
dividend), the actual dividend amount
paid on the stock is used for the
additional dividend payment.
(3) Deferred payments. A payment
occurs when the amount of a dividend
equivalent is fixed pursuant to the terms
of the transaction, even if paid or
otherwise taken into account on a later
date. For example, if a specified NPC
provides for a payment at settlement
that takes into account an earlier
dividend payment, the dividend
equivalent is treated as paid on the date
that the amount of the dividend

E:\FR\FM\05DEP1.SGM

05DEP1

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules
equivalent is fixed pursuant to the terms
of the contract.
(4) Examples. The following examples
illustrate the rules of paragraph (h) of
this section. For purposes of these
examples, Stock X is common stock of
Corporation X, a domestic corporation,
that historically pays quarterly
dividends on Stock X. The parties
anticipate that Corporation X will
continue to pay the quarterly dividends.

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

Example 1. Forward contract to purchase
domestic stock. (i) When Stock X is trading
at $50 per share, Foreign Investor enters into
a forward contract to purchase 100 shares of
Stock X in one year. Reasonable estimates of
the quarterly dividend are specified in the
transaction documents. The price in the
forward contract is determined by
multiplying the number of shares referenced
in the contract by the current price of the
shares and an interest rate, and subtracting
the future value of any dividends expected to
be paid during the term of the contract.
Assuming that the forward contract is priced
using an interest rate of 4 percent and
estimated dividends with a future value of $1
per share during the term of the forward
contract, the purchase price set in the
forward contract is $5,100 (100 shares × $50
per share × 1.04¥($1 × 100)).
(ii) Subject to paragraph (h)(2)(iv), the
estimated dividend amount is the per share
dividend amount because the estimate is
reasonable and specified in accordance with
paragraph (h)(2)(iii) of this section. Those
estimated per share dividend amounts are
dividend equivalents for purposes of this
section.
Example 2. Price return only swap
contract. (i) Foreign Investor enters into a
price return swap contract that entitles
Foreign Investor to receive payments based
on the appreciation in the value of 100 shares
of Stock X and requires Foreign Investor to
pay an amount based on LIBOR plus any
depreciation in the value of Stock X. The
swap contract does not explicitly entitle
Foreign Investor to payments based on
dividends paid on Stock X during the term
of the contract and the swap contract does
not contain any reference to an estimated
dividend amount. The LIBOR rate on the
swap contract, however, is reduced to reflect
expected annual dividends on Stock X.
(ii) Because the LIBOR leg of the swap
contract is reduced to reflect estimated
dividends and the estimated dividend
amount is not specified, Foreign Investor is
treated as receiving the actual dividend
amount in accordance with paragraph (h)(2)
of this section. Those actual per share
dividend amounts are dividend equivalents
for purposes of this section.

(i) Amount of dividend equivalent—
(1) Calculation of the amount of a
dividend equivalent—(i) Securities
lending or sale-repurchase transactions.
For a securities lending or salerepurchase transaction, the amount of
the dividend equivalent for each
underlying security equals the amount
of the actual per share dividend paid on

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

the underlying security multiplied by
the number of shares of the underlying
security transferred pursuant to the
securities lending or sale-repurchase
transaction.
(ii) Specified NPCs and specified
ELIs—(A) In general. For a specified
NPC or a specified ELI, the amount of
the dividend equivalent for each
underlying security equals:
(1) The amount of the per share
dividend (as determined under
paragraph (h) of this section) with
respect to the underlying security
multiplied by;
(2) The number of shares of the
underlying security as calculated
pursuant to paragraph (i)(1)(ii)(B) of this
section multiplied by;
(3) The delta of the section 871(m)
transaction with respect to the
underlying security at the time that the
amount of the dividend equivalent is
determined.
(B) Calculation of the number of
shares—(1) In general. Except as
provided in paragraph (i)(1)(ii)(B)(2) of
this section, the number of shares of an
underlying security for purposes of this
section is the number of shares of the
underlying security referenced in the
section 871(m) transaction.
(2) Adjustments. When a section
871(m) transaction multiplies the
number of shares of an underlying
security by a factor or fraction, or
otherwise alters the amount of a
payment, the number of shares of a
section 871(m) transaction is adjusted to
take into account the factor, fraction, or
other alteration provided by the section
871(m) transaction. For example, if a
total return swap entitles a long party to
receive a payment based on the
appreciation and dividend amount on
100 shares of an underlying security
multiplied by a factor of 1.50, the
number of shares of the underlying
security is 150 shares.
(C) Delta at the time the amount of the
dividend equivalent is determined—(1)
In general. The delta of a section 871(m)
transaction at the time that the amount
of the dividend equivalent is
determined is the delta of the section
871(m) transaction determined at the
time specified in paragraph (i)(2) of this
section. This delta is used solely for
purposes of determining the amount of
the dividend equivalent at that time,
and the transaction is not retested to
determine if it is a section 871(m)
transaction. For example, if a
transaction had a delta of 0.80 when
acquired by the long party and was a
section 871(m) transaction, the
transaction remains a section 871(m)
transaction even if the delta is below

PO 00000

Frm 00029

Fmt 4702

Sfmt 4702

73139

0.70 at the time the amount of the
dividend equivalent is determined.
(2) Delta of an option at lapse. The
delta of an option when it lapses is
treated as zero.
(3) Delta of an option at exercise. The
delta of an option when it is exercised
is treated as one (1.0).
(iii) Other substantially similar
payments. In addition to any amount
determined pursuant to paragraph
(i)(1)(i) or (ii), the amount of a dividend
equivalent includes the amount of any
payment described in paragraph (f) of
this section.
(2) Time for determining the amount
of a dividend equivalent—(i) In general.
Except as provided in paragraph
(i)(2)(ii) of this section, the amount of a
dividend equivalent is determined on
the earlier of the date that the
underlying security becomes exdividend with respect to the dividend
and the record date of the dividend. For
example, if a specified NPC provides for
a payment at settlement that takes into
account an earlier dividend payment,
the amount of a dividend equivalent is
determined on the earlier of the exdividend date or the record date for that
dividend.
(ii) Specified NPCs and specified ELIs
with a term of one year or less. For a
specified NPC or specified ELI with a
term of one year or less when acquired
by the long party, the amount of a
dividend equivalent is determined
when the long party disposes of the
section 871(m) transaction. For
purposes of this paragraph, to dispose of
means to sell, exercise, terminate, allow
to lapse or expire, transfer, settle
(whether in cash or otherwise), cancel,
exchange, convert, surrender, forfeit, or
otherwise dispose of or allow to expire.
(iii) Term. For purposes of this
section, if a transaction does not specify
a term, the transaction is treated as
having a term of more than one year. If
a transaction permits extensions, the
term of the transaction is the maximum
term permitted by the transaction.
(j) Limitation on the treatment of
certain transactions as section 871(m)
transactions—(1) Dealers—(i) In
general. A potential section 871(m)
transaction is not a section 871(m)
transaction if the potential section
871(m) transaction is entered into by a
qualified dealer in its capacity as a
dealer in securities and the dealer is the
long party with respect to the
underlying security. This paragraph
does not apply with respect to any
proprietary position held by a dealer in
securities.
(ii) Qualified dealer. A qualified
dealer is any dealer that:

E:\FR\FM\05DEP1.SGM

05DEP1

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

73140

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

(A) Is subject to regulatory
supervision by a governmental authority
in the jurisdiction in which it was
created or organized; and
(B) furnishes a written certification to
the short party confirming that the
dealer is a qualified dealer acting in its
capacity as a dealer in securities and
that the dealer will withhold and
deposit any tax imposed by section
871(m) with respect to any section
871(m) transactions that the dealer
enters into as a short party in its
capacity as a dealer in securities.
(2) Corporate acquisitions. A potential
section 871(m) transaction is not a
section 871(m) transaction with respect
to an underlying security if the
transaction obligates the long party to
acquire ownership of the underlying
security as part of a plan pursuant to
which one or more persons (including
the long party) are obligated to acquire
underlying securities representing more
than 50 percent of the value of the entity
issuing the underlying securities. To
qualify for the exception provided in
this paragraph, the long party must
furnish a written certification, provided
under penalties of perjury, to the short
party that it satisfies the requirements of
this paragraph (j)(2).
(k) Rules relating to indices—(1)
Qualified index not treated as an
underlying security. For purposes of this
section, a qualified index is treated as a
single security that is not an underlying
security. The determination of whether
an index is a qualified index is made at
the time that a long party acquires a
potential section 871(m) transaction and
is determinative only with respect to
that transaction. Therefore, an index can
be a qualified index with respect to a
transaction entered into on one day and
not be a qualified index with respect to
a transaction entered into on another
day.
(2) Qualified index. A qualified index
means an index that:
(i) References 25 or more component
underlying securities;
(ii) References only long positions in
component underlying securities;
(iii) Contains no component
underlying security that represents more
than 10 percent of the weighting of the
underlying securities in the index;
(iv) Is modified or rebalanced only
according to predefined objective rules
at set dates or intervals;
(v) Does not provide a dividend yield
from component underlying securities
that is greater than 1.5 times the current
dividend yield of the S&P 500 Index as
reported for the month immediately
preceding the date the long party
acquires the potential section 871(m)
transaction; and

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

(vi) Futures contracts or option
contracts on the index (whether the
contracts provide price only or total
return exposure to the index) trade on
a national securities exchange that is
registered with the Securities and
Exchange Commission or a domestic
board of trade designated as a contract
market by the Commodity Futures
Trading Commission.
(3) Safe harbor for indices that
primarily reference assets other than
underlying securities. Notwithstanding
paragraph (k)(2) of this section, an index
is a qualified index if the index is
comprised solely of long positions in
assets and the referenced component
underlying securities in the aggregate
comprise 10 percent or less of the
index’s weighting.
(4) Weighting of component
underlying securities. For purposes of
paragraph (k) of this section, the
weighting of a component underlying
security of an index is the percentage of
the index’s value represented, or
accounted for, by the component
underlying security.
(5) Indices with components other
than underlying securities. Any
component of an index that is not an
underlying security is not taken into
account for purposes of determining
whether an index is a qualified index,
except for purposes of paragraph (k)(3)
of this section.
(6) Transactions that reference a
qualified index and one or more
underlying securities or indices. If a
potential section 871(m) transaction
references a qualified index and one or
more underlying securities or indices,
the qualified index will remain a
qualified index only if the potential
section 871(m) transaction does not
reference a short position in any
referenced component underlying
security of the qualified index, other
than a short position with respect to the
entire qualified index (for example, a
cap or floor). If, in connection with a
potential section 871(m) transaction that
references a qualified index, a taxpayer
(or a related person within the meaning
of section 267(b) or 707(b)) enters into
one or more transactions that reduce
exposure to any referenced component
underlying security of the index, other
than transactions that reduce exposure
to the entire index, then the potential
section 871(m) transaction is not treated
as referencing a qualified index.
(l) Combined transactions—(1) In
general. For purposes of determining
whether a potential section 871(m)
transaction is a section 871(m)
transaction, two or more potential
section 871(m) transactions are treated

PO 00000

Frm 00030

Fmt 4702

Sfmt 4702

as a single transaction with respect to an
underlying security when:
(i) A person (or a related person
within the meaning of section 267(b) or
707(b)) is the long party with respect to
the underlying security for each
potential section 871(m) transaction;
(ii) The potential section 871(m)
transactions reference the same
underlying security; and
(iii) The potential section 871(m)
transactions are entered into in
connection with each other (regardless
of whether the transactions are entered
into simultaneously or with the same
counterparty).
(2) Time and delta for testing.
Combined transactions are tested each
time the long party (or a related person)
acquires a potential section 871(m)
transaction to which paragraph (l)(1) of
this section applies. The deltas used to
determine whether the combined
transactions are section 871(m)
transactions pursuant to paragraph (l)(1)
of this section are the deltas of each of
the combined transactions at that time.
For example, if a taxpayer buys a call
option on day 1 and sells a put option
on day 10 on the same underlying
security and the two transactions are
entered into in connection with each
other, the call option is tested on day 1
to determine whether it is a section
871(m) transaction, and the combined
single transaction is tested on day 10
based on the deltas of the call option
and put option at that time.
(3) Section 871(m) transactions. If a
potential section 871(m) transaction is a
section 871(m) transaction, either by
itself or as a result of a combination, it
does not cease to be a section 871(m)
transaction as a result of applying
paragraph (l) of this section.
(4) More than one underlying security
referenced. If potential section 871(m)
transactions reference more than one
underlying security, paragraph (l)(1) of
this section applies separately with
respect to each underlying security.
(5) Separate transactions for all other
purposes. Potential section 871(m)
transactions that are combined for
purposes of determining whether there
is a section 871(m) transaction with
respect to an underlying security are
treated as separate transactions for all
other purposes of this section, including
separately determining the amount of a
dividend equivalent with respect to
each transaction. For withholding
obligations with respect to combined
transactions, see § 1.1441–1(b)(4)(xxiii).
(6) Example. The following examples
illustrate the rules of paragraph (l) of
this section. For purposes of this
paragraph (l)(6), Foreign Investor (FI) is
a nonresident alien individual and

E:\FR\FM\05DEP1.SGM

05DEP1

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules
Stock X is common stock of Corporation
X, a domestic corporation.

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

Example 1. (i) FI purchases a call option
with a term of six months that references 100
shares of Stock X, and simultaneously sells
a six month put option on 100 shares of
Stock X. The delta of the call option is 0.45
and the delta of the put option is 0.40 at the
time FI acquired each option.
(ii) Because the purchased call option and
the sold put option are entered into
simultaneously by FI and reference the same
underlying security, the facts and
circumstances indicate that the call option
and the put option are entered into in
connection with each other and are treated as
a combined transaction under paragraph
(l)(1) of this section. Accordingly, the call
option and the put option are treated as a
combined transaction to compute delta for
purposes of paragraph (e) of this section. The
delta of the combined purchased call option
and written put option is 0.85 (0.45 + 0.40).
The combined transaction is therefore a
specified ELI.
Example 2. (i) FI purchases a call option
with a term of six months that references 100
shares of Stock X. At the time, the delta of
the call option is 0.45. Three months later,
FI re-evaluates FI’s position in Stock X and
writes a three month put option on 100
shares of Stock X. At the time FI writes the
put option, the delta of the call option is 0.65
and the delta of the put is 0.25.
(ii) FI’s purchased call option and sold put
option reference the same underlying
security. Because FI wrote the put option
referencing Stock X to adjust FI’s economic
position associated with the call option
referencing Stock X, these options are
entered into in connection with each other
and treated as a combined transaction under
paragraph (l)(1) of this section. Because the
delta of the combined transaction is tested on
the date that FI entered into the additional
transaction, the delta of the combined
purchased call option and sold put option is
0.90 (0.65 + 0.25). The combined transaction
is a specified ELI.
Example 3. (i) FI purchases a call option
with a term of one month that references 100
shares of Stock X. At the time, the delta of
the call option is 0.75. Two weeks later, FI
re-evaluates FI’s position in Stock X and
writes a two week put option on 100 shares
of Stock X. At the time FI writes the put
option, the delta of the call option is 0.35 and
the delta of the put is 0.25.
(ii) FI’s purchased call option has an initial
delta of .75 and therefore is a specified ELI
and a section 871(m) transaction. FI’s
purchased call option and sold put option
reference the same underlying security.
Because FI sold the put option referencing
Stock X to adjust FI’s economic position
associated with the call option referencing
Stock X, these options are entered into in
connection with each other and treated as a
combined transaction under paragraph (l)(1)
of this section. Because the delta of the
combined transaction is tested on the date
that FI entered into the additional
transaction, the delta of the combined
purchased call option and sold put option is
0.6 (0.35 + 0.25). The combined transaction

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

is not a specified ELI; however, the
purchased call option remains a specified
ELI.

(m) Rules relating to interests in
entities that are not taxable as
corporations—(1) In general. Except as
provided in paragraph (m)(2) of this
section, if a transaction references an
interest in an entity that is not a C
corporation (within the meaning of
section 1361(a)(2)), the transaction
references the allocable portion of any
underlying security or potential section
871(m) transaction held, directly or
indirectly (including through one or
more other entities that are not C
corporations), by the referenced entity.
When a transaction references any
underlying security as a result of the
application of this paragraph, the
transaction also references the payment
of any dividends from those underlying
securities and has a dividend equivalent
equal to the allocable portion of any
dividend or dividend equivalent
received, directly or indirectly
(including through one or more other
entities that are not C corporations), by
the referenced entity.
(2) Exception. A transaction is not
treated as referencing underlying
securities as a result of applying
paragraph (m)(1) of this section if the
underlying securities held directly or
indirectly by the referenced entity and
the underlying securities referenced by
any potential section 871(m) transaction
held directly or indirectly by the
referenced entity represent, in the
aggregate, 10 percent or less of the value
of the referenced interest in the entity at
the time the long party acquires the
transaction and there is no plan or
intention for acquisitions or
dispositions (within the meaning of
paragraph (i)(2)(ii) of this section) that
would cause underlying securities to
represent more than 10 percent of the
value of the referenced interest. For
example, if actively-traded Partnership
A owns a pro rata interest in Partnership
B that represents 10 percent of the value
of an interest in Partnership A, and
Partnership B owns an interest in
Underlying Security X that represents
20 percent of the value of an interest in
Partnership B, then Underlying Security
X represents two percent of the value of
a pro rata interest in Partnership A.
Accordingly, a pro rata interest in
Partnership A qualifies for the exception
in paragraph (m)(2) of this section and
Underlying Security X is not treated as
referenced by a transaction that
references a pro rata interest in
Partnership A pursuant to paragraph
(m)(1) of this section.
(n) Anti-abuse rule. If a taxpayer
(directly or through the use of a related

PO 00000

Frm 00031

Fmt 4702

Sfmt 4702

73141

person) acquires a transaction or
transactions with a principal purpose of
avoiding the application of this section,
the Commissioner may treat any
payment (as described in paragraph (h)
of this section) made with respect to any
transaction as a dividend equivalent to
the extent necessary to prevent the
avoidance of this section. Therefore,
notwithstanding any other provision of
this section, the Commissioner may
adjust the delta of a transaction, change
the number of shares, adjust an
estimated dividend amount, adjust the
timing of payments, combine, separate,
or disregard transactions, indices, or
components of indices to reflect the
substance of the transaction or
transactions, or otherwise depart from
the rules of this section as necessary to
determine whether the transaction
includes a dividend equivalent or the
amount or timing of a dividend
equivalent.
(o) Information required to be
reported regarding a potential section
871(m) transaction—(1) In general. If a
broker or dealer is a party to a potential
section 871(m) transaction with a
counterparty or customer that is not a
broker or dealer, the broker or dealer is
required to determine whether the
potential section 871(m) transaction is a
section 871(m) transaction. If both
parties to the potential section 871(m)
transaction are brokers or dealers, or
neither party to the potential section
871(m) transaction is a broker or dealer,
the short party must determine whether
the potential section 871(m) transaction
is a section 871(m) transaction. The
party to the transaction that is required
to determine whether a transaction is a
section 871(m) transaction must also
determine and report to the
counterparty or customer the timing and
amount of any dividend equivalent (as
described in paragraphs (h) and (i) of
this section). The party required to make
the determinations described in this
paragraph is required to exercise
reasonable diligence to determine
whether a transaction is a section
871(m) transaction, any dividend
equivalents, and any other information
necessary to apply the rules of this
section. The information must be
provided in the manner prescribed in
paragraphs (o)(2) and (o)(3) of this
section. The determinations required by
paragraph (o) of this section are binding
on the parties to the potential section
871(m) transaction and on any person
who is a withholding agent with respect
to the potential section 871(m)
transaction, unless the person has actual
knowledge or reason to know that the

E:\FR\FM\05DEP1.SGM

05DEP1

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

73142

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules

information received is incorrect, but
are not binding on the IRS.
(2) Reporting requirements. For rules
regarding reporting requirements with
respect to dividend equivalents
described in this section, see §§ 1.1461–
1(b) and (c), and 1.1474–1(c) and (d).
(3) Additional information on
potential section 871(m) transactions—
(i) In general. Upon request by any
person described in paragraph (o)(3)(ii)
of this section, the party required to
provide information pursuant to
paragraph (o)(1) must provide the
requester with information regarding the
amount of each dividend equivalent, the
delta of the potential section 871(m)
transaction, the amount of any tax
withheld and deposited, the estimated
dividend amount if specified in
accordance with paragraph (h)(2)(iii),
and any other information necessary to
apply the rules of this section. With
respect to the delta, the party must
provide the delta when the transaction
is acquired, at the time the amount of
each dividend equivalent is determined,
and at any other time delta information
is necessary to apply the rules of this
section. The information requested must
be provided within a reasonable time,
not to exceed 14 calendar days, and
communicated in one or more of the
following ways:
(A) By telephone, and confirmed in
writing;
(B) By written statement sent by first
class mail to the address provided by
the requesting party;
(C) By electronic publication available
to all persons entitled to request
information; or
(D) By any other method agreed to by
the parties, and confirmed in writing.
(ii) Persons entitled to request
information. The following persons may
request the information specified in
paragraph (o) of this section with
respect to a potential section 871(m)
transaction from the party required by
paragraph (o)(3)(i) of this section to
provide the information—
(A) A broker who holds the potential
section 871(m) transaction as an agent
or nominee to any party to the
transaction as described in paragraph
(a)(7) of this section;
(B) A person who is required to make
an information return under § 1.1461–
1(c) and paragraph (o)(2) of this section
and who acts as an agent or nominee to
any party to the transaction as described
in paragraph (a)(7) of this section; or
(C) Any party to the transaction as
described in paragraph (a)(7) of this
section.
(iii) Reliance on information received.
A person described in paragraph (o)(1)
or (o)(3)(ii) of this section that receives

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

information described in paragraph
(o)(1) or (o)(3)(i) of this section (first
recipient) may rely on that information
to provide information to any other
person unless the first recipient has
actual knowledge or reason to know that
the information received is incorrect.
When the first recipient has actual
knowledge or reason to know that the
information received is incorrect, the
first recipient must make a reasonable
effort to determine and provide the
information described in paragraph
(o)(1) or (o)(3)(i) of this section to any
person described in paragraph (o)(1) or
(o)(3)(ii) of this section that requests
information from the first recipient.
(4) Recordkeeping rules. For rules
regarding recordkeeping requirements
sufficient to establish the amount of
gross income treated as a dividend
equivalent, see § 1.6001–1.
(p) Effective/applicability date. This
section applies to payments made on or
after the date of publication of the
Treasury decision adopting these rules
as final regulations in the Federal
Register, except for paragraph (d)(1) of
this section, which applies to payments
made on or after January 23, 2012.
■ Par. 4. Section 1.1441–1 is amended
by:
■ 1. Adding paragraphs (b)(4)(xxii) and
(xxiii).
■ 2. Adding paragraph (f)(3).
The additions read as follows:
§ 1.1441–1 Requirement for the deduction
and withholding of tax on payments to
foreign persons.

*

*
*
*
*
(b) * * *
(4) * * *
(xxii) Amounts paid with respect to a
notional principal contract described in
§ 1.871–15(a)(5), an equity-linked
instrument described in § 1.871–
15(a)(4), or a securities lending or salerepurchase transaction described in
§ 1.871–15(a)(10) are exempt from
withholding under section 1441(a) as
dividend equivalents under section
871(m) if the transaction is not a section
871(m) transaction within the meaning
of § 1.871–15(a)(9) or is subject to an
exception described in § 1.871–15(j).
However, the amounts may be subject to
withholding under section 1441(a) if
they are subject to tax under any section
other than section 871(m). For purposes
of this withholding exemption, it is not
necessary to provide documentation
establishing that a notional principal
contract or equity-linked instrument has
a delta that is less than 0.70 at the time
it was acquired by the long party. For
purposes of the withholding exemption
for qualified dealers described in this
paragraph, § 1.871–15(j)(1) applies only

PO 00000

Frm 00032

Fmt 4702

Sfmt 4702

if the long party furnishes to the
withholding agent the documentation
described in § 1.871–15(j)(1). For
purposes of the withholding exemption
regarding corporate acquisitions
described in this paragraph, the
exemption only applies if the long party
furnishes to the withholding agent the
documentation described in § 1.871–
15(j)(2).
(xxiii) If a potential section 871(m)
transaction is only a section 871(m)
transaction as a result of applying
§ 1.871–15(l) (combined transactions)
and the withholding agent did not know
that the long party (or a related person)
entered into the potential section
871(m) transaction in connection with
any other potential section 871(m)
transactions, the potential section
871(m) transaction is exempt from
withholding under section 1441(a).
*
*
*
*
*
(f) * * *
(3) Effective/applicability date.
Paragraphs (b)(xxii) and (xxiii) of this
section apply to payments made on or
after the date of publication of the
Treasury decision adopting these rules
as final regulations in the Federal
Register.
■ Par. 5. Section 1.1441–2 is amended
by adding paragraph (d)(5) and adding
a sentence to the end of paragraph (f) to
read as follows:
§ 1.1441–2 Amounts subject to
withholding.

*

*
*
*
*
(d) * * *
(5) Payments of dividend equivalents.
A withholding agent is not obligated to
withhold until the later of—
(i) The time that the amount of a
dividend equivalent is determined as
provided in § 1.871–15(i)(2), and
(ii) The time that the withholding
agent is deemed to have control over
money or other property of the long
party because—
(A) Money or other property is paid
to or from the long party,
(B) The withholding agent has
custody or control over money or other
property of the long party at any time
on or after the amount of a dividend
equivalent is determined as provided in
§ 1.871–15(i)(2), or
(C) The section 871(m) transaction
provides for an upfront payment or prepayment of the purchase price even
though an actual payment has not been
made at the time the amount of a
dividend equivalent is determined as
provided in § 1.871–15(i)(2).
*
*
*
*
*
(f) Effective/applicability date. * * *
Paragraph (d)(5) of this section applies
to payments made on or after the date

E:\FR\FM\05DEP1.SGM

05DEP1

Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Proposed Rules
of publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register.
■ Par. 6. Section 1.1441–3 is amended
by:
■ 1. Adding a second sentence to
paragraph (h)(1).
■ 2. Redesignating paragraph (h)(2) as
(h)(3) and revising paragraph (h)(3).
■ 3. Adding new paragraph (h)(2).
The additions and revisions read as
follows:
§ 1.1441–3
withheld.

Determination of amounts to be

ehiers on DSK2VPTVN1PROD with PROPOSALS-1

*

*
*
*
*
(h) * * * (1) * * * Withholding is
required on the amount of the dividend
equivalent calculated under § 1.871–
15(i).
(2) Reliance by withholding agent on
reasonable determinations. For
purposes of determining whether a
payment is a dividend equivalent and
the amount of a dividend equivalent
described in § 1.871–15, a withholding
agent may rely on the information
received from the party to the
transaction that is required to determine
whether a transaction is a section
871(m) transaction as provided in
§ 1.871–15(o), unless the withholding
agent has actual knowledge or reason to
know that the information received is
incorrect. When a withholding agent
fails to withhold the required amount
because the party described in § 1.871–
15(o) fails to reasonably determine or
timely provide whether a transaction is
a section 871(m) transaction, the
amount of any dividend equivalent, or
any other information required to be
provided pursuant to § 1.871–15(o) and
the withholding agent reasonably relied
on that party’s determination, then the
failure to withhold is imputed to the
party required to make the
determinations described in § 1.871–
15(o). In that case, the IRS may collect
any underwithheld amount from the
party to the transaction that is required
to make the determinations described in
§ 1.871–15(o) and subject that party to
applicable interest and penalties as a
withholding agent.
(3) Effective/applicability date. Except
for the first sentence of paragraph (h)(1),
this paragraph (h) applies to payments
made on or after the date of publication
of the Treasury decision adopting these
rules as final regulations in the Federal
Register. The first sentence of paragraph
(h)(1) applies to payments made on or
after January 23, 2012.
*
*
*
*
*
■ Par. 7. Section 1.1441–7 is amended
by:
■ 1. Adding entry for Example 7 in
paragraph (a)(3).

VerDate Mar<15>2010

13:56 Dec 04, 2013

Jkt 232001

2. Adding a second sentence to
paragraph (a)(4).
The additions read as follows:

■

§ 1.1441–7 General provisions relating to
withholding agents.

(a) * * *
(3) * * *
Example 7. CO is a domestic clearing
organization. CO serves as a central
counterparty clearing and settlement service
provider for derivatives exchanges in the U.S.
CB is a broker organized in Foreign Country
X and a clearing member of CO. CB is a
nonqualified intermediary, as defined in
§ 1.1441–1(c)(14). FC is a foreign corporation
that has an investment account with CB. FC
instructs CB to purchase a call option that is
a specified ELI (as described in § 1.871–
15(e)). CB effects the trade for FC. The
exchange matches FC’s order with an order
for a written call option with the same terms.
The exchange then sends the matched trade
to CO, which clears the trade. CB and the
clearing member representing the call option
seller settle the trade with CO. Upon
receiving the matched trade, the option
contracts are novated and CO becomes the
counterparty to CB and the counterparty to
the clearing member representing the call
option seller. To the extent that there is a
dividend equivalent with respect to the call
option, both CO and CB are withholding
agents as described in paragraph (a)(1) of this
section.

(4) Effective/applicability date.
Example 7 of paragraph (a)(3) of this
section applies to payments made on or
after the date of publication of the
Treasury decision adopting these rules
as final regulations in the Federal
Register.
*
*
*
*
*
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2013–28932 Filed 12–4–13; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF EDUCATION
34 CFR Chapter VI
Negotiated Rulemaking Committee,
Notice of Additional Committee
Meeting—Title IV Federal Student Aid
Programs, Gainful Employment in a
Recognized Occupation
Office of Postsecondary
Education, Department of Education.
ACTION: Notice of intent to establish
negotiated rulemaking committee.
AGENCY:

On June 12, 2013, we
announced our intention to establish a
negotiated rulemaking committee to
prepare proposed regulations to
establish standards for programs that
prepare students for gainful

SUMMARY:

PO 00000

Frm 00033

Fmt 4702

Sfmt 4702

73143

employment in a recognized
occupation. We also announced the
schedule for two sessions of committee
meetings. We now announce the
addition of a third session consisting of
a one-day committee meeting.
DATES: The date, times, and location of
the third committee meeting are set out
in the Schedule for Negotiations section
under SUPPLEMENTARY INFORMATION,
below.
FOR FURTHER INFORMATION CONTACT: For
information about the content of this
notice, including information about the
negotiated rulemaking process, contact:
Wendy Macias, U.S. Department of
Education, 1990 K Street NW., Room
8017, Washington, DC 20006.
Telephone: (202) 502–7526 or by email:
wendy.macias@ed.gov.
For general information about the
negotiated rulemaking process, see The
Negotiated Rulemaking Process for Title
IV Regulations, Frequently Asked
Questions at http://www2.ed.gov/policy/
highered/reg/hearulemaking/hea08/negreg-faq.html.
If you use a telecommunications
device for the deaf or text telephone,
call the Federal Relay Service, toll free,
at 1–800–877–8339.
Individuals with disabilities can
obtain this document in an accessible
format (e.g., braille, large print,
audiotape, or compact disc) on request
to the program contact person listed
under FOR FURTHER INFORMATION
CONTACT.
SUPPLEMENTARY INFORMATION: On June
12, 2013, we published a notice in the
Federal Register (78 FR 35179)
announcing our intention to establish a
negotiated rulemaking committee to
prepare proposed regulations for the
Federal Student Aid programs
authorized under title IV of the Higher
Education Act of 1965, as amended
(HEA) (title IV Federal Student Aid
programs) that would establish
standards for programs that prepare
students for gainful employment in a
recognized occupation. In that notice,
we set a schedule for two sessions of
committee meetings and requested
nominations for individual negotiators
who represent key stakeholder
constituencies for the issues to be
negotiated to serve on the committee.
Because of the shutdown of the
Federal Government due to the lapse in
appropriations for fiscal year 2014, on
November 7, 2013, we announced in the
Federal Register (78 FR 66865) that we
were rescheduling the second session of
committee meetings from October 21–
23, 2013, to November 18–20, 2013,
with the meeting on the final day
running from 9:00 a.m. to 5:00 p.m.

E:\FR\FM\05DEP1.SGM

05DEP1