The IRS announced that, in response to comments that the proposed effective date of regulations issued under Sec. 871(m) would not give taxpayers sufficient time to build and test the systems required to implement the rules, it was further extending the effective date until 2014 (Correction to T.D. 9572, 8/31/12). The IRS issued both temporary and proposed regulations on Jan. 23, 2012, providing guidance on withholding on certain dividend equivalents to nonresident aliens and foreign corporations that hold notional principal contracts providing for payments determined by reference to payments of dividends from sources within the United States.
Sec. 871(m) was enacted by the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, in 2010. It treats as U.S.-source dividends transactions that provide for a payment contingent upon or determined by reference to a U.S.-source dividend (dividend equivalent), such as securities loans, sale-repurchase transactions, and certain notional principal contracts called “specified notional principal contracts” (specified NPCs).
The statutory definition of a specified NPC (found in Sec. 871(m)(3)(A)) is effective for only two years; and for payments after March 18, 2012, any notional principal contract will be a specified NPC unless the IRS determines it is of a type that does not have a potential for tax avoidance under Sec. 871(m)(3)(B).
The temporary regulations originally extended the statutory definition of a specified NPC through Dec. 31, 2012, thus postponing the treatment of all notional principal contracts as specified NPCs unless the IRS determined they are of a type that does not have a potential for tax avoidance.
When they were issued, the proposed regulations contained proposed treatment of dividend equivalents under Sec. 871(m), beginning Jan. 1, 2013. The IRS’s amendment to the regulations announced Aug. 31, 2012, will extend these rules for another year so the statutory treatment of a specified NPC under Sec. 871(m)(3)(B) will apply through Dec. 31, 2013, and the proposed rules under Sec. 871(m)(3)(A) will apply after that date.
For prior coverage, see “Statutory definition of specified notional principal contract extended through 2012.”
–Sally P. Schreiber (
sschreiber@aicpa.org
) is a JofA senior editor.
