n-26-61.pdf

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

Notice 2026-61

I. PURPOSE
This Notice provides taxpayers with additional guidance for complying with the
final regulations with respect to dividend equivalents 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 2027,
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2028, and 2029. Specifically, this Notice extends
the transition relief provided in Notice 2024-44, 2024-25 I.R.B. 1737, for two years, as
described in more detail below. The Department of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS) intend to amend the section 871(m) regulations
to delay the applicability date of certain rules in those final 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).
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II. BACKGROUND
On June 14, 2010, the Treasury Department and the IRS published Notice 2010-

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Unless otherwise provided, all references to years refer to calendar years.
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The terms used in this Notice have the meanings provided in the section 871(m) regulations.

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46, which addresses potential overwithholding in the context of securities lending and
sale-repurchase agreements. Notice 2010-46 provides a two-part solution to the
problem of overwithholding on a chain of dividends and dividend equivalents. First, it
provides an exception from withholding for payments to a qualified securities lender
(QSL). Second, it provides a proposed framework to credit forward prior withholding on
a chain of substitute dividends paid pursuant to a chain of securities loans or stock
repurchase agreements. The QSL regime requires a person that agrees to act as a
QSL to comply with certain withholding and documentation requirements. The Treasury
Department and the IRS permitted withholding agents to rely on transition rules
described in Notice 2010-46, Part III, until guidance was developed that would include
documentation and substantiation of withholding.
On September 18, 2015, the Federal Register published final regulations and
temporary regulations (TD 9734, 80 FR 56866) (2015 final regulations and 2015
temporary regulations, respectively). The 2015 final regulations finalized a portion of a
2013 notice of proposed rulemaking (78 FR 73128). The 2015 temporary regulations
were based on comments received with respect to the 2013 notice of proposed
rulemaking and were accompanied by a notice of proposed rulemaking cross-
referencing the 2015 temporary regulations (80 FR 56415). The Treasury Department
and the IRS stated in the preamble to the 2015 temporary regulations that the final
qualified derivatives dealer (QDD) regulations would supplant the proposed regulatory
framework described in Notice 2010-46. 80 FR at 56878.

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On July 18, 2016, the Treasury Department and the IRS published Notice 2016-
42, 2016-29 I.R.B. 67, which contained the proposed qualified intermediary agreement
(QI Agreement) that included provisions relating to the QDD regime and reiterated the
intent to replace the proposed regulatory framework described in Notice 2010-46 with
the QDD regime.
On December 19, 2016, the Treasury Department and the IRS published Notice
2016-76, 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 and announced that taxpayers may continue to rely on Notice 2010-46 until
January 1, 2018.
On January 17, 2017, the Treasury Department and the IRS published Revenue
Procedure 2017-15, 2017-3 I.R.B. 437, which set forth the final QI Agreement (2017 QI
Agreement), including the requirements and obligations applicable to QDDs, and
provided that taxpayers may continue to rely on Notice 2010-46 during 2017. The 2017
QI Agreement expired on December 31, 2022.
On January 24, 2017, the Federal Register published final regulations and
temporary regulations (TD 9815, 82 FR 8144) (2017 final regulations and 2017
temporary regulations, respectively, and together, the 2017 regulations). The 2017 final
regulations finalized the 2015 notice of proposed rulemaking (80 FR 56415) that was
issued in conjunction with the 2015 temporary regulations. On the same day, the
Federal Register also published a notice of proposed rulemaking cross-referencing the

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2017 temporary regulations (82 FR 8172), with correcting amendments published in the
Federal Register on October 26, 2017 (82 FR 49508) (together, the 2017 proposed
regulations).
The applicability dates in the 2017 regulations reflect the phased-in application
described in Notice 2016-76. See Treas. Reg. §1.871-15(r). Also, consistent with
Notice 2016-76 and other announcements, the “Effect on Other Documents” section of
the preamble to the 2017 regulations obsoleted Notice 2010-46 as of January 1, 2018.
In response to a comment requesting that the QSL regime remain, the preamble to the
2017 regulations noted that “[w]hile the Treasury Department and the IRS understand
that the QSL regime was administratively more convenient for taxpayers than the QI
regime, it created administrability problems, particularly with respect to verification, for
the IRS. That regime is being replaced by incorporating the QDD rules into the existing
QI framework, including the specific rules for pooled reporting on Form 1042-S, and the
QI requirements for compliance review and certification.” 82 FR at 8153.
On August 21, 2017, the Treasury Department and the IRS published Notice
2017-42, 2017-34 I.R.B. 212, which extended certain transition relief.
On February 5, 2018, the Treasury Department and the IRS published Notice
2018-5, 2018-6 I.R.B. 341, which permitted withholding agents to apply the transition
rules from Notice 2010-46 in 2018 and 2019.
On October 1, 2018, the Treasury Department and the IRS published Notice
2018-72, 2018-40 I.R.B. 522, which further extended certain transition relief and

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permitted withholding agents to apply the transition rules from Notice 2010-46 in 2020.
On December 17, 2019, the Federal Register published final regulations (TD
9887, 84 FR 68790), which finalized the 2017 proposed regulations.
On January 13, 2020, the Treasury Department and the IRS published Notice
2020-2, 2020-3 I.R.B. 327, which extended the phase-in period described in Notice
2018-72 through 2022.
On September 12, 2022, the Treasury Department and the IRS published Notice
2022-37, 2022-37 I.R.B. 234, which extended the phase-in period described in Notice
2020-2 through 2024.
On December 27, 2022, the Treasury Department and the IRS published
Revenue Procedure 2022-43, 2022-52 I.R.B. 570, which set forth the QI Agreement
currently in effect (2023 QI Agreement), including the requirements and obligations
applicable to QDDs and the relevant transition rules for the phase-in period in Notice
2022-37 applicable to QDDs and to QIs acting as QSLs in 2023 and 2024. The 2023 QI
Agreement expires on December 31, 2028.
On June 17, 2024, the Treasury Department and the IRS published Notice 2024-
44, which extended the phase-in period described in Notice 2022-37 through 2026.
This Notice further extends the phase-in period described in Notice 2024-44
through 2028.
The Treasury Department and the IRS continue to evaluate the section 871(m)
regulations and will take into account comments already received, and welcome any

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additional comments regarding tax policy considerations, legal authority for, and the IRS
administrative feasibility of any suggested modifications to the section 871(m)
regulations. The Treasury Department and the IRS intend to provide sufficient time for
taxpayers and withholding agents to implement any changes to the section 871(m)
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).
The Treasury Department and the IRS have determined that it is appropriate for
taxpayers and withholding agents to delay the implementation of certain provisions in
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 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 through 2028. As noted in Part I of this Notice, the
anti-abuse rule continues to apply to the phased-in application of the section 871(m)
regulations, including for the purpose of determining whether a transaction is a delta-
one transaction.

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Notice 2016-76 provided 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. As a result of
extensions in Notice 2017-42, Notice 2018-72, Notice 2020-2, Notice 2022-37, and
Notice 2024-44 (together, the Prior Notices), the good faith effort standard applies to (1)
any delta-one transaction in 2017 through 2026, and (2) any non-delta-one transaction
that is a section 871(m) transaction pursuant to §1.871-15(d)(2) or (e) in 2027. This
Notice further extends the periods during which the enforcement standards provided by
Notice 2024-44 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 through 2028, and (2) any non-delta-one transaction
that is a section 871(m) transaction pursuant to §1.871-15(d)(2) or (e) in 2029.
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 2023 QI
Agreement, this Notice extends through 2028 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
section 871(m) regulations and the relevant provisions of the 2023 QI Agreement. In
addition, the IRS will consider a QDD to satisfy the obligations that apply specifically to
a QDD under its 2023 QI Agreement through 2028 provided that the QDD makes a

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good faith effort to comply with the relevant provisions of the 2023 QI Agreement, to the
extent applicable to the QDD.
IV. EXTENSION OF THE SIMPLIFIED STANDARD FOR DETERMINING
WHETHER TRANSACTIONS ARE COMBINED TRANSACTIONS

Notice 2016-76 and the Prior Notices provided a simplified standard for
withholding agents to determine whether transactions are combined transactions
entered into in 2017 through 2026. Specifically, a withholding agent is required to
combine transactions entered into in those years 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 those years.
This Notice further extends the period during which this simplified standard for
combined transactions applies to include 2027 and 2028. Transactions that are entered
into in 2017 through 2028 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 through 2028 that are not combined under
this simplified standard will not become combined transactions as a result of applying
§1.871-15(n) to these transactions in future years, unless a reissuance or other event
causes the transactions to be retested to determine whether they are section 871(m)

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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. As noted in Part I of this Notice, the anti-abuse
rule continues to apply to the phased-in application of the section 871(m) regulations,
including for the purpose of determining whether multiple transactions should be
combined.
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
section 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.

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Comments requested that the Treasury Department and the IRS adopt a different
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 exposure method 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 exposure method, 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
exposure method, 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 would not be subject to tax under section 881(a)(1) or subject to
withholding under chapters 3 and 4.
The Prior Notices announced 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

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through 2026 in its equity derivatives dealer capacity or withholding on those dividends
(including deemed dividends). This Notice announces that the Treasury Department
and the IRS intend to amend those provisions to provide that a QDD will not be subject
to tax on dividends and dividend equivalents received in 2027 and 2028 in its equity
derivatives dealer capacity or withholding on those dividends (including deemed
dividends) as well, provided that the QDD identifies these dividends received in its
equity derivative dealer capacity on its withholding statement in the same manner as
required in the 2023 QI Agreement for 2023 and 2024.
Section 4.01(1) of Rev. Proc. 2017-15 provided that a QDD would not be liable
for tax under section 871(a) or 881 on dividend equivalents that it received in its equity
derivatives dealer capacity in 2017, and therefore also provided that a QDD would be
required to compute its section 871(m) amount using the net delta exposure method
beginning in 2018. Similarly, the 2023 QI Agreement provided in section 3.09 that a
QDD would not be liable for tax under section 871(a) or 881 on dividend equivalents
that it received in its equity derivatives dealer capacity in 2023 and 2024. The Prior
Notices provided that a QDD would be required to compute its section 871(m) amount
using the net delta exposure method beginning in 2027. This Notice provides that a
QDD will not be required to compute its section 871(m) amount using the net delta
exposure method through 2028.
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

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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 provided 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.” Section 10.01(C) of the 2023 QI Agreement
provides that: “For calendar years 2023 and 2024, 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 factual information in Appendix I with respect to its
QDD activities.” A QDD is not required to perform a periodic review or provide factual
information in Appendix I with respect to its QDD activities for 2017 through 2026. This
Notice provides that a QDD is not required to perform a periodic review or provide
factual information in Appendix I with respect to its QDD activities for 2027 or 2028.
VI. EXTENSION OF TRANSITION RULES FROM NOTICE 2010-46

Notice 2018-5, Notice 2018-72, Notice 2020-2, Notice 2022-37, and Notice 2024-
44 provided that notwithstanding the preamble to the 2017 regulations, withholding
agents may apply the QSL transition rules described in Notice 2010-46, Part III, for
payments made in 2018 through 2026. This Notice provides that withholding agents
may also apply the QSL transition rules described in Notice 2010-46, Part III, Parts C,

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D, and E for payments made in 2027 and 2028.
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VII. PAPERWORK REDUCTION ACT
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520) (PRA) generally
requires a Federal agency to obtain approval from the Office of Management and
Budget (OMB) before conducting or sponsoring a collection of information from the
public, whether the collection is mandatory, voluntary, or required to obtain or retain a
benefit. An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a currently valid OMB control number.
Section V of this notice references collection of information requirements for
taxpayers that are currently approved by OMB under control number 1545-0096 and
1545-0097. This notice does not create a new collection of information or make a
substantive or material modification to the collection already approved by OMB.
VIII. TAXPAYER RELIANCE

Before the promulgation of the amendments to the section 871(m) regulations or
the issuance of other guidance, taxpayers and withholding agents (including QIs for
purposes of the 2023 QI Agreement) 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

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For earlier periods, see Internal Revenue Service, FATCA-FAQs General, General compliance, Q26 (Sept. 12, 2024)
https://www.irs.gov/businesses/corporations/frequently-asked-questions-faqs-fatca-compliance-legal, (explaining
that the references to the Notice 2010-46 transition rule in the Prior Notices include only the QSL transition rule,
not the credit forward framework).

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transactions as described in section IV and may apply the QSL transition rules
described in section VI.
IX. 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).