IRS Again Extends Relief for Section 871(m) Rules on Dividend Equivalent Payments

The IRS on May 22 further extended (Notice 2024-44) through 2026 the phase-in period for complying with certain regulations under Section 871(m) on dividend equivalent payments and related withholding.

Section 871(m) Regulations and Previous Extensions

The IRS in 2010 aimed to address the issue of overwithholding on a chain of dividends and dividend equivalents. Notice 2010-46 created an exception from withholding for payments to a qualified securities lender (QSL) and proposed a framework to credit forward prior withholding. The notice provided that withholding agents could rely on transition rules therein until the IRS issued further guidance. 

In 2015, the IRS published final, temporary, and proposed regulations under Section 871(m) that set out qualified derivatives dealer (QDD) rules intended to replace the framework described in Notice 2010-46.

In 2016, the IRS provided a phase-in period for the Section 871(m) regulations, allowing taxpayers to rely on Notice 2010-46 until January 1, 2018. Additional Section 871(m) regulations published in 2017 reflected this phase-in period. The IRS then extended the transition period in 2018, 2019, 2020, and 2022. Prior to the current notice, Notice 2022-37 most recently extended the transition relief through 2024. 

In December 2022, the IRS published a new Qualified Intermediary (QI) Agreement in Revenue Procedure 2022-43, following the expiration of the 2017 QI Agreement in 2022. The 2023 QI Agreement includes 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.

Latest Extension of Phase-In Period

Notice 2024-44 further extends through 2026 the phase-in period previously described in Notice 2022-37. This includes extensions of:

  • The phase-in relief for delta-one and non-delta-one transactions,
  • The simplified standard for determining whether transactions are combined transactions, 
  • The phase-in relief for qualified derivatives dealers, and
  • The QSL transition rules from Notice 2010-46.

Until further guidance is issued, taxpayers and withholding agents, including QIs for purposes of the 2023 QI Agreement, may rely on the provisions in Notice 2024-44 with respect to the phase-in relief for delta-one/non-delta-one transactions and qualified derivatives dealers. Withholding agents may also rely on the simplified standard described in the notice for determining whether transactions are combined transactions and may apply the QSL transition rules described in the notice.

BDO Insight

Absent further changes to the regime, contracts entered into on or after January 1, 2026, would then be subject to Section 871(m) if they have a delta that is 0.8 or above. This would cause many more contracts to be subject to Section 871(m), and withholding agents and taxpayers would need to develop systems to identify such contracts.