[Federal Register Volume 77, Number 34 (Tuesday, February 21, 2012)]
[Rules and Regulations]
[Pages 9846-9847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3909]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9579]
RIN 1545-BJ78
Source of Income From Qualified Fails Charges
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations that prescribe the
source of income received on a qualified fails charge under section 863
of the Internal Revenue Code (Code). The regulations finalize proposed
regulations and withdraw temporary regulations published on December 8,
2010, and affect persons that pay or are entitled to receive qualified
fails charges, including withholding agents.
DATES: Effective Date. These regulations are effective on February 21,
2012.
Applicability Date. For the date of applicability, see Sec. 1.863-
10(g).
FOR FURTHER INFORMATION CONTACT: Karen Walny, Office of Associate Chief
Counsel (International) (202) 622-3870 (not a toll free call).
SUPPLEMENTARY INFORMATION:
Background
In response to persistent delivery failures in delivery-versus-
payment transactions involving U.S. Treasury securities (Treasuries),
the Treasury Market Practices Group (TMPG) and the Securities Industry
and Financial Markets Association published a trading practice
governing failed deliveries of Treasuries in 2008. In July, 2009, the
Treasury Department and the Internal Revenue Service (IRS) issued
Notice 2009-61 (2009-2 CB 181), which provided that the IRS will not
challenge the position taken by a taxpayer or a withholding agent that
a fails charge paid with respect to a Treasury on or before December
31, 2010 is not subject to U.S. gross basis taxation. On December 8,
2010, the Treasury Department and the IRS issued temporary and proposed
regulations that establish source rules for a fails charge paid with
respect to a Treasury, with a correction to the temporary regulations
on December 28, 2010. 75 FR 76262, 75 FR 76321, and 75 FR 81457,
respectively.
The temporary and proposed regulations provide that the source of
income from a qualified fails charge is generally determined by
reference to the residence of the taxpayer that is the recipient of the
qualified fails charge income, with two exceptions. Qualified fails
charge income earned by a qualified business unit (QBU) of a taxpayer
is sourced to the country in which the QBU is engaged in a trade or
business, and qualified fails charge income that arises from a
transaction the income from which is effectively connected to a United
States trade or business is sourced in the United States and treated as
effectively connected to the conduct of a United States trade or
business.
No comments were received on the proposed regulations, and no
hearing was requested or held. This Treasury decision adopts the
proposed regulations with the changes discussed in this preamble.
Explanation of Provisions
These final regulations adopt, with one substantive change, the
proposed regulations on the source of a qualified fails charge. The
final regulations also make a number of clarifying changes to the
language of the regulations.
The preamble to the temporary regulations noted that no trading
practice existed at that time for fails charges on securities other
than Treasuries, but that if a fails charge trading practice pertaining
to other securities was endorsed by the TMPG or an agency of the United
States government, the Treasury Department and the IRS would consider
whether the source rule in the regulations should be extended to those
fails charges. The TMPG has subsequently endorsed a trading practice
for debentures issued by the Federal National Mortgage Association
(Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac),
and the Federal Home Loan Banks and agency pass-through mortgage-backed
securities issued or guaranteed by the Government National Mortgage
Association (Ginnie Mae), Fannie Mae, and Freddie Mac (Agency Debt and
Agency MBS, respectively) beginning in February, 2012.
The Treasury Department and the IRS have determined that the same
source rule should apply to fails charges incurred with respect to
Agency Debt and Agency MBS as to fails charges on Treasuries.
Accordingly, these final regulations expand the scope of a qualified
fails charge to fails charges paid with respect to Agency Debt. The
sourcing rule in the final regulations also applies to a fails charge
on Agency MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae
(for tax purposes, Fannie Mae, Freddie Mac, and Ginnie Mae do not issue
Agency MBS). The final regulations do not address the source of any
other payment, including a fails charge that is not a qualified fails
charge.
The Treasury Department and the IRS are considering whether
separate guidance is needed on the source of income attributable to
certain payments, other than qualified fails charges, that arise in
securities lending transactions or repurchase transactions and request
comments regarding this issue.
Effective Date
These regulations are effective on February 21, 2012.
Applicability Date
These regulations apply to a qualified fails charge paid or accrued
on or after December 8, 2010.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13563. Therefore, a regulatory
assessment is not required. It has also been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does
not apply to
[[Page 9847]]
these regulations, and because these regulations do not impose a
collection of information on small entities, the provisions of the
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant
to section 7805(f) of the Code, the proposed regulations preceding
these regulations were submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Karen Walny, Office of
the Associate Chief Counsel (International). However, other persons
from the Office of Associate Chief Counsel (International) and the
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 863(a) and 7805 * * *
0
Par. 2. Section 1.863-10 is added to read as follows:
Sec. 1.863-10 Source of income from a qualified fails charge.
(a) In general. Except as provided in paragraphs (b) and (c) of
this section, the source of income from a qualified fails charge shall
be determined by reference to the residence of the taxpayer as
determined under section 988(a)(3)(B)(i).
(b) Qualified business unit exception. The source of income from a
qualified fails charge shall be determined by reference to the
residence of a qualified business unit (as defined in section 989) of a
taxpayer if--
(1) The taxpayer's residence, determined under section
988(a)(3)(B)(i), is the United States;
(2) The qualified business unit's residence, determined under
section 988(a)(3)(B)(ii), is outside the United States;
(3) The qualified business unit is engaged in the conduct of a
trade or business in the country where it is a resident; and
(4) The transaction to which the qualified fails charge relates is
attributable to the qualified business unit. A transaction will be
treated as attributable to a qualified business unit if it satisfies
the principles of Sec. 1.864-4(c)(5)(iii) (substituting ``qualified
business unit'' for ``U.S. office'').
(c) Effectively connected income exception. Qualified fails charge
income that arises from a transaction any income from which is (or
would be if the transaction produced income) effectively connected with
a United States trade or business pursuant to Sec. 1.864-4(c) is
treated as from sources within the United States, and the income from
the qualified fails charge is treated as effectively connected to the
conduct of a United States trade or business.
(d) Qualified fails charge. For purposes of this section, a
qualified fails charge is a payment that--
(1) Compensates a party to a transaction that provides for delivery
of a designated security (as defined in paragraph (e) of this section)
in exchange for the payment of cash (delivery-versus-payment
settlement) for another party's failure to deliver the specified
designated security on the settlement date specified in the relevant
agreement; and
(2) Is made pursuant to--
(i) A trading practice or similar guidance approved or adopted by
either an agency of the United States government or the Treasury Market
Practices Group, or
(ii) Any trading practice, program, policy or procedure approved by
the Commissioner in guidance published in the Internal Revenue
Bulletin.
(e) Designated security. For purposes of this section, a designated
security means any--
(i) Debt instrument (as defined in Sec. 1.1275-1(d)) issued by the
United States Treasury Department, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, or any Federal
Home Loan Bank; or
(ii) Pass-through mortgage-backed security guaranteed by the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, or the Government National Mortgage Association.
(g) Effective/applicability date. This section is effective on
February 21, 2012. This section applies to a qualified fails charge
paid or accrued on or after December 8, 2010.
Sec. 1.863-10T [Removed]
0
Par. 3. Section 1.863-10T is removed.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: February 14, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury, Tax Policy.
[FR Doc. 2012-3909 Filed 2-17-12; 8:45 am]
BILLING CODE 4830-01-P