Notices
Treasury and the IRS separately issued a number of notices that provide transition rules, provide a phase-in period for certain provisions of the Section 871(m) Regulations, and defer the effective date for portions of the regulations under Section 871(m) (see Notices 2010-46, 2016-76, 2017-42, 2018-5, 2018-72, and 2020-2). The various notices provide the following:
- Transactions in-scope based on their delta are limited to ‘delta one’ transactions; as a result, transactions with a delta less than 1 but greater than 0.8 (delta .80 transactions) generally will not be in scope until a specified date;
- The simplified combination rule will continue to apply for withholding agents until a specified date;
- Withholding on actual and deemed dividends paid to QDDs is deferred until a specified date;
- The good-faith periods for the implementation of Section 871(m) are extended; and
- Withholding agents are permitted to apply the transition rules from Notice 2010-46.
These items are discussed in further detail below.
Extension of the phase-in years for delta-one and non-delta-one transactions
Notice 2022-37 provides that the Section 871(m) Regulations will (1) continue to apply only to any delta-one transaction entered into through the end of 2024 (this limitation was due to expire at the end of 2022), and (2) begin to apply to any non-delta-one transaction that is a Section 871(m) transaction pursuant to Treas. Reg. sec. 1.871-15(d)(2) or (e) in 2025 (i.e., any derivative with a delta of 0.8 or greater or that fails the “substantial equivalent test”). A delta-one transaction is a transaction in which the value of the derivative moves in tandem with the underlying asset on which the derivative is based and the change in value is one-to-one.
Notice 2022-37 provides the anti-abuse rule in Treas. Reg. sec. 1.871-15(o) will continue 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. As a result of the anti-abuse rule, a transaction that otherwise would not be treated as a Section 871(m) transaction may be treated as one.
For purposes of IRS enforcement and administration of the QDD rules in the Section 871(m) Regulations and the relevant provisions of the 2017 QI Agreement and of a revised QI Agreement that is anticipated to apply beginning January 1, 2023 (2023 QI Agreement), Notice 2022-37 extends through 2024 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 2017 QI Agreement and the 2023 QI Agreement.
Observation: Notice 2022-37 generally is consistent with the substance of prior extensions and thus in effect extends the status quo for an additional two years.