ABA Asks for Changes to Proposed Section 871(m) Dividend Equivalent Regulations

The Tax Section of the American Bar Association ("ABA") submitted comments to the IRS and Treasury Department on proposed regulations issued on December 5, 2013 under Section 871(m) of the Internal Revenue Code. The comments advocate that such rules be modified to exclude certain transactions from coverage and to increase the "delta" threshold of 0.70 for imposing withholding on dividend equivalents on derivatives.

Generally, Section 871(m) imposes withholding tax on certain actual or implicit payments on certain notional principal contracts and other equity-linked instruments that are contingent upon, or determined by reference to, the payment of a dividend from sources within the United States. The proposed regulations generally would apply with respect to payments on equity derivatives referencing U.S. stocks or most indices containing U.S. stocks (except Qualified Indices) with a "delta" of 0.70 or greater with respect to the underlying security at the time the derivative is acquired.

Among other items, the Bar Association asked that the corporate acquisition exception be expanded by lowering the ownership threshold and changing the notification requirement, and that equity-based executive compensation, such as phantom stock options, for services performed outside the United States by non-U.S. persons be excluded from the coverage of Section 871(m). It also suggested eliminating the requirement that a "Qualified Index" be modified or rebalanced only according to predefined objective rules, and that options with a delta less than 1.0 should not be subject to the rules where there is no adjustment in the option for actual dividends. In addition, the Bar Association suggested that certain structured notes with leveraged upside, buffered downside or some combination of the two not be covered, even if initially issued with a delta of 1.0, where such delta is reasonably expected to fluctuate substantially over the life of the note.

The IRS has set a year-end goal to finalize the proposed regulations with an effective date of January 1, 2016.

See: ABA Comment Letter.
See also: FATCA Materials Specialty Page (available to Cabinet subscribers only).

For more information, please contact Dan Mulcahy or Mark Howe.