n-17-42.pdf

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Extension of the Phase-in Period for the Enforcement and Administration of Section
871(m)

Notice 2017-42

I. PURPOSE
This Notice provides taxpayers with additional guidance for complying with the
final and temporary regulations under sections 871(m), 1441, 1461, and 1473 of the
Internal Revenue Code (the Code) (collectively referred to as the section 871(m)
regulations) in 2018
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and 2019. Specifically, this Notice announces that the Department
of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to
amend the section 871(m) regulations to delay the effective/applicability date of certain
rules in those final regulations. This Notice also extends the phase-in period provided in
Notice 2016-76, 2016-51 I.R.B. 834, for certain provisions of the section 871(m)
regulations.
The anti-abuse rule provided in §1.871-15(o) will continue to apply during the
phase-in years described in this Notice. As a result, a transaction that would not
otherwise be treated as a section 871(m) transaction (including as a result of this
Notice) may be a section 871(m) transaction under §1.871-15(o).
II. BACKGROUND
On September 18, 2015, the Federal Register published final regulations and

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Unless otherwise provided, all references to years refer to calendar years.

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temporary regulations (TD 9734, 80 FR 56866), which finalized a portion of a 2013
notice of proposed rulemaking (78 FR 73128), and introduced new temporary
regulations based on comments received with respect to that notice of proposed
rulemaking (80 FR 56415) (2015 final regulations and 2015 temporary regulations,
respectively).
On December 19, 2016, the Treasury Department and the IRS published Notice
2016-76, 2016-51 I.R.B. 834, which provided for the phased-in application of certain
provisions of the section 871(m) regulations to allow for the orderly implementation of
those final regulations.
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On December 30, 2016, the Treasury Department and the IRS released
Revenue Procedure 2017-15, 2017-3 I.R.B. 437, which contains the final QI withholding
agreement (2017 QI Agreement), including the requirements and obligations applicable
to qualified derivatives dealers (QDDs).
On January 24, 2017, the Federal Register published final regulations and
temporary regulations (TD 9815, 82 FR 8144) (the 2017 regulations), which finalized the
2015 notice of proposed rulemaking (80 FR 56415) that was issued in conjunction with
the 2015 temporary regulations. The effective/applicability dates in the 2017 final
regulations reflect the phased-in application described in Notice 2016-76. See Treas.
Reg. §1.871-15(r)(3).
As described in more detail in sections III through V of this Notice, this Notice

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The terms used in this Notice have the meanings provided in the section 871(m) regulations.

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extends parts of the phase-in period described in both Notice 2016-76 and Rev. Proc.
2017-15 for one additional year. Dealers, issuers, and other withholding agents have
indicated that the phase-in period for delta-one transactions provided in Notice 2016-76
and Rev. Proc. 2017-15 has provided them with valuable time to test and further
develop their withholding and reporting systems. Even with the 2017 phase-in period,
these market participants have indicated that they would benefit from additional time to
refine their systems based on the testing that has occurred in 2017. In addition,
dealers, issuers, and other withholding agents continue to design, build, and test new
withholding and reporting systems that will enable testing and withholding on non-delta-
one transactions, and have requested additional time to complete those systems before
being required to comply with the section 871(m) regulations with respect to non-delta-
one transactions. Finally, consistent with Executive Order 13777 (82 FR 12285), the
Treasury Department and the IRS continue to evaluate the section 871(m) regulations
and consider possible agency actions that may reduce unnecessary burdens imposed
by the regulations.
III. EXTENSION OF THE PHASE-IN YEAR FOR DELTA-ONE AND NON-DELTA-
ONE TRANSACTIONS

This section describes the extension to the phased-in application of the section
871(m) regulations to delta-one and non-delta-one transactions. This Notice does not
apply to any transaction that is a section 871(m) transaction pursuant to §1.871-15(d)(1)
(providing that before January 1, 2017, a notional principal contract (NPC) is a specified
NPC if certain factors are present).

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The Treasury Department and the IRS have determined that it is appropriate for
taxpayers and withholding agents to have additional time to implement the section
871(m) regulations for non-delta-one transactions, including transactions that are
combined transactions under §1.871-15(n). Therefore, the Treasury Department and
the IRS intend to revise the effective/applicability date for §1.871-15(d)(2) and (e) to
provide that these rules will not apply to any payment made with respect to any non-
delta-one transaction issued before January 1, 2019.
Notice 2016-76 provides that the IRS will take into account the extent to which
the taxpayer or withholding agent made a good faith effort to comply with the section
871(m) regulations with respect to delta-one transactions in 2017 and non-delta-one
transactions in 2018 when it enforces the section 871(m) regulations. This Notice
extends the periods during which the enforcement standards provided by Notice 2016-
76 will apply. Consistent with this extension, the IRS will take into account the extent to
which the taxpayer or withholding agent made a good faith effort to comply with the
section 871(m) regulations in enforcing the section 871(m) regulations for (1) any delta-
one transaction in 2017 and 2018, and (2) any non-delta-one transaction that is a
section 871(m) transaction pursuant to §1.871-15(d)(2) or (e) in 2019.
Similarly, for purposes of the IRS’s enforcement and administration of the QDD
rules in the section 871(m) regulations and the relevant provisions of the 2017 QI
Agreement, this Notice extends through 2018 the period during which the IRS will take
into account the extent to which the QDD made a good faith effort to comply with the

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section 871(m) regulations and the relevant provisions of the 2017 QI Agreement. In
addition, the IRS intends to revise the 2017 QI Agreement to provide that a QDD will be
considered to satisfy the obligations that apply specifically to a QDD under that
agreement for 2018 provided that the QDD makes a good faith effort to comply with the
relevant provisions of the 2017 QI Agreement.
IV. EXTENSION OF THE SIMPLIFIED STANDARD FOR DETERMINING
WHETHER TRANSACTIONS ARE COMBINED TRANSACTIONS

Notice 2016-76 provided a simplified standard for withholding agents to
determine whether transactions entered into in 2017 are combined transactions.
Specifically, a withholding agent is required to combine transactions entered into in
2017 for purposes of determining whether the transactions are section 871(m)
transactions only when the transactions are over-the-counter transactions that are
priced, marketed, or sold in connection with each other. Withholding agents are not
required to combine any transactions that are listed securities entered into in 2017.
This Notice extends the period during which this simplified standard for combined
transactions applies to include 2018. Transactions that are entered into in 2017 and
2018 that are combined under this simplified standard will continue to be treated as
combined transactions for future years and will not cease to be combined transactions
as a result of applying §1.871-15(n) or disposing of less than all of the potential section
871(m) transactions that are combined under this rule. Transactions that are entered
into in 2017 and 2018 that are not combined under this simplified standard will not
become combined transactions as a result of applying §1.871-15(n) to these

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transactions in future years, unless a reissuance or other event causes the transactions
to be retested to determine whether they are section 871(m) transactions. See §1.871-
15(g)(2) (providing that the delta of a potential section 871(m) transaction generally is
determined on the earlier of when the transaction is (1) priced or (2) issued); see also
§1.871-15(a)(6) (defining the term “issue” to include “an issuance as a result of a
deemed exchange pursuant to section 1001”). This simplified standard applies only to
withholding agents, and does not apply to taxpayers that are long parties to potential
section 871(m) transactions.
V. EXTENSION OF PHASE-IN RELIEF FOR QUALIFIED DERIVATIVES
DEALERS

Section 1.871-15T(q)(1) of the 2015 temporary regulations provided that when a
QDD received a dividend or dividend equivalent payment and the QDD was
contractually obligated to make an offsetting dividend equivalent payment on the same
underlying security in an amount that was less than the dividend and dividend
equivalent amount received, the QDD would be liable for tax under section 871(a) or
881 for the difference. The 2015 final regulations provided that a withholding agent who
made a payment of a dividend to a qualified intermediary acting as a QDD was not
required to withhold on that payment if the withholding agent reliably associated the
payment with a valid qualified intermediary withholding form containing a certification
described in §1.1441-1(e)(3)(ii)(E). See §1.1441-1(b)(4)(xxii) of the 2015 final
regulations.
Comments requested that the Treasury Department and the IRS adopt a different

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method of determining a QDD’s tax liability. Those comments generally requested that
this method be based on the QDD’s net delta exposure for each underlying security.
The Treasury Department and the IRS agreed that the net delta approach was an
administrable and accurate method for a QDD to determine its residual exposure to
underlying securities, and the 2017 final regulations adopted the net delta exposure
method.
In adopting the net delta approach, the Treasury Department and the IRS were
concerned that the exemption from withholding on dividends paid to a QDD, when
combined with the net delta exposure method, could result in U.S. source dividends
escaping U.S. tax completely in certain circumstances. Therefore, the 2017 final
regulations revised §§1.871-15(q)(1) and 1.1441-1(b)(4)(xxii) to provide that a QDD
remains liable for tax under section 881(a)(1) and subject to withholding under chapters
3 and 4 on dividends. However, to allow taxpayers time to implement the net delta
approach, the 2017 QI Agreement and the 2017 final regulations provided that
dividends and dividend equivalents received by a QDD in its equity derivatives dealer
capacity in 2017 will not be subject to tax under section 881(a)(1) or subject to
withholding under chapters 3 and 4.
This Notice announces that the Treasury Department and the IRS intend to
amend §§1.871-15(q)(1) and (r)(3), and 1.1441-1(b)(4)(xxii)(C) to provide that a QDD
will not be subject to tax on dividends and dividend equivalents received in 2017 and
2018 in its equity derivatives dealer capacity or withholding on dividends (including

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deemed dividends).
Section 4.01(1) of Rev. Proc. 2017-15 provides that a QDD will be required to
compute its section 871(m) amount using the net delta approach beginning in 2018.
This Notice provides that a QDD will be required to compute its section 871(m) amount
using the net delta approach beginning in 2019.
A QDD will remain liable for tax under section 881(a)(1) on dividends and
dividend equivalents that it receives in any capacity other than as an equity derivatives
dealer, and on any other U.S. source FDAP payments that it receives (whether or not in
its equity derivatives dealer capacity). In addition, a QDD is responsible for withholding
on dividend equivalents it pays to a foreign person on a section 871(m) transaction,
whether acting in its capacity as an equity derivatives dealer or otherwise.
Finally, section 10.01(C) of the 2017 QI Agreement provides that: “For calendar
year 2017, a QDD is not required to perform a periodic review with respect to its QDD
activities (as otherwise required by section 10.04 of this Agreement) or provide the
factual information specified in Appendix I.” This Notice provides that a QDD is not
required to perform a periodic review with respect to its QDD activities for calendar year
2017 and 2018. Note that a QDD must use the same year for the periodic review of its
QI activities and its QDD activities. A QI that is a QDD must choose 2019 or a later
year within its periodic review period in which to perform its periodic review unless its
applicable periodic review period ends in 2018 or an earlier year.
VI. TAXPAYER RELIANCE

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Before the promulgation of the amendments to the section 871(m) regulations
and the 2017 QI Agreement, taxpayers may rely on the provisions of this Notice
regarding the proposed amendments described in sections III and V. Withholding
agents may rely on the simplified standard for determining whether transactions are
combined transactions as described in section IV.
VII. DRAFTING INFORMATION

The principal authors of this Notice are Karen Walny and Peter Merkel of the
Office of Associate Chief Counsel (International). For further information regarding this
Notice, contact Karen Walny or Peter Merkel at (202) 317-6938 (not a toll-free call).