Last week, the Internal Revenue Service (IRS) issued Notice 2022-37, which further extends the phase-in period for compliance with final regulations under sections 871(m), 1441, 1461, and 1473 regarding dividend equivalents (the section 871(m) regulations).
The notice extends the phase-in application of the section 871(m) regulations to delta-one and non-delta-one instruments.Generally, a delta-one instrument is a derivative instrument that tracks an underlying stock on a one-for-one basis, while a non-delta-one instrument does not. Specifically, the notice delays the applicability date for Treas. Reg. § 1.871-15(d)(2) (specified notional principal contracts) and Treas. Reg. § 1.871-15(e) (specified equity-linked instruments) to January 1, 2025. The IRS previously delayed the full implementation of these rules. See Notice 2016-76 (delaying effective date until January 1, 2018), Notice 2017-42 (delaying effective date until January 1, 2019), Notice 2018-72 (delaying the effective date until January 1, 2021), and Notice 2020-2 (delaying effective date until January 1, 2023).
During this time, the IRS will consider any good faith efforts to comply with the section 871(m) regulations with respect to such transactions when it fully implements the regulations. The IRS will similarly consider any good faith efforts by qualified derivatives dealers (QDDs) to comply with the section 871(m) regulations and relevant provisions the Qualified Intermediary Agreement (both the current version and the version effective January 1, 2023) (the QI Agreement), and the IRS is considering whether to provide guidance under which such a good faith effort would be found to satisfy the obligations of the QDD under its QI Agreement prior to 2025.
The notice also extends relief in related areas:
- The simplified standard for withholding agents to determine whether transactions are combined transactions, as detailed in Notice 2016-76, is extended to apply for transactions entered into in 2023 and 2024.
- A QDD will not be subject to tax or withholding on dividends and dividend equivalents received in 2023 and 2024 in its equity derivatives dealer capacity.
- Withholding agents may rely on the qualified securities lender (QSL) transition rules detailed in Notice 2010-46 for payments made in 2023 and 2024. The transition rules provide an exception for withholding for payments to a QSL, as well as a framework to allow credit forwarding in chains of securities loans or stock purchase agreements.