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Proposed Regulations Under Section 871(m) Introduce a “Delta” Test for Withholding on U.S. Equity-Linked Instruments—Expect Turbulence Ahead  

Author:  Jason Schwartz.; Mark Howe.; Daniel Mulcahy.

Source: Volume 31, Number 03, Spring 2014 , pp.3-20(18)

Journal of Taxation of Investments

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On December 4, 2013, the IRS and the Treasury Department issued proposed regulations under Section 871(m) of the Internal Revenue Code that, if finalized in their current form, would impose withholding tax on any U.S. equity-linked instruments that satisfy a “delta”-based withholding standard, even if those instruments do not in fact reference dividend payments. The proposed regulations are broad, lack clarity, may be difficult to comply with, and could invite transactional structures motivated by tax avoidance. This article discusses the proposed regulations, as well as the current withholding rules.

Keywords: IRC Sec. 871(m); TD 9648; withholding rules; delta; dividend equivalent payment; equity-linked instrument; swap

Affiliations:  1: Cadwalader, Wickersham & Taft LLP; 2: Cadwalader, Wickersham & Taft LLP; 3: Cadwalader, Wickersham & Taft LLP.

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