It seems we are always awaiting section 871(m) guidance, and the latest bit of guidance from the IRS comes, not unexpectedly, with a sense of déjà vu.

The IRS announced two pieces of section 871(m) guidance on December 16, 2019. First, it finalized certain temporary regulations that were issued in 2017, without any substantive changes. Those regulations consider, among other things, the definition of a broker, qualification of foreign securities exchanges for listed options delta determination purposes and identification of the section 871(m) responsible party in multi-broker transactions. Again, no substantive changes. But the bigger piece of news appears in a separate Notice 2020-02. In the notice, the IRS is again extending the phase-in implementation period for certain other section 871(m) provisions.

Notice 2020-02 reads much like prior Notice 2018-72. The transitional framework which applies to the more problematic (especially in terms of mechanics) of the section 871(m) rules is being extended for two additional years until the end of 2022.

What this means is that non-delta-one transactions (derivative contracts that do not move in value on a 1:1 ratio with their referenced underliers) remain out-of-scope for section 871(m) purposes until January 1, 2023. Delta-one transactions, however, remain subject to section 871(m) under existing rules.

Moreover, withholding agents continue to obtain relief from the somewhat vexatious combined transaction rule. Under the transitional framework, withholding agents only need to combine multiple transactions for section 871(m) qualification analysis for over-the-counter transactions that are priced, marketed, or sold in connection with each other. This “simplified” combined transaction rule is extended until the end of 2022 as well.

Among other highlights:

  • Qualified Derivative Dealers (QDDs) will not be subject withholding on actual dividends from U.S. stock until January 1, 2023.
  • The “net delta” approach for QDD tax liability determinations is also being pushed to 2023, as are periodic review of QDD activities under the Qualified Intermediary (QI) agreement.
  • The Qualified Securities Lender (QSL) regime used by certain financial institutions to avoid cascading withholding taxes on repo and securities lending transactions, which was to sunset at the end of 2020, now is extended for two years through the end of 2022.

The IRS notes, however, that the general anti-abuse rules in the section 871(m) regulations remain in effect during the transition period.