Client Alert
| January 25, 2012
New Temporary and Proposed Regulations Affect Taxation of US Equity Derivatives
On January 19, 2012, the Internal Revenue Service and the Treasury Department issued new temporary and proposed regulations under several sections of the Internal Revenue Code of 1986, as amended (the "Code"), addressing the classification and tax treatment of “dividend equivalent” payments on US equity derivatives pursuant to section 871(m) of the Code. The temporary and proposed regulations provide transitory relief to taxpayers by extending the applicability of the original statutory definition of “specified notional principal contracts” through the end of 2012. The proposed regulations also address the application of tax treaties to dividend equivalent payments and the interaction of section 871(m) and section 892, which governs the treatment of income received by non-US governments and international organizations. Although the extension of the original statutory definition of specified notional principal contracts is a positive development, certain of the rules in the proposed regulations will pose significant challenges to financial institutions that are active in the US equity markets.
This memorandum is intended only as a general discussion of these issues. It is not considered to be legal advice. We would be pleased to provide additional details or advice about specific situations. For additional information on this important topic, please feel free to call upon your Dewey & LeBoeuf relationship partner. No part of this publication may be reproduced, in whole or in part, in any form, without our prior written consent.
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