[Federal Register Volume 68, Number 248 (Monday, December 29, 2003)]
[Rules and Regulations]
[Pages 74847-74848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31671]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9103]
RIN 1545-BC97


Information Statements for Certain Substitute Payments

AGENCY: Internal Revenue Service (IRS) Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 6045(d) 
that reflect the changes to information reporting for payments in lieu 
of dividends effected by the Jobs and Growth Tax Relief Reconciliation 
Act of 2003 (JGTRRA). These regulations provide that brokers must file 
information returns and furnish information statements reporting 
substitute payments in lieu of dividends to individuals who receive 
substitute payments in lieu of dividends on or after January 1, 2003.

DATES: Effective Date: These final regulations are effective December 
29, 2003.
    Applicability Date: These regulations apply to information returns 
required to be filed, and information statements required to be 
furnished, after December 31, 2003.

FOR FURTHER INFORMATION CONTACT: Michael Hara of the Office of 
Associate Chief Counsel (Procedure and Administration), (202) 622-4910 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 302 of the Jobs and Growth Tax Relief Reconciliation Act of 
2003 (the JGTRRA), Public Law No. 108-27 (117 Stat. 752), reduced the 
tax rate for ``qualified dividends'' paid to an individual shareholder 
to the same tax rate as capital gains for taxable years beginning after 
December 31, 2002, and beginning before January 1, 2009. The 
legislative history states, however, ``Payments in lieu of dividends 
are not eligible for the lower rates.'' See H.R. Rep. No. 108-94, 108th 
Cong., 1st Sess. 31 n.36 (2003).

Explanation of Provisions

    Section 6045(a) of the Internal Revenue Code (Code) provides that 
every person doing business as a broker shall, when required by the 
Secretary, make a return showing the name and

[[Page 74848]]

address of each customer, together with information as required by 
forms and regulations. Section 6045(d) provides that brokers who 
transfer a customer's securities for use in a short sale or similar 
transaction, and receive payments in lieu of a dividend, tax-exempt 
interest, or other items set forth in regulations (substitute 
payments), must furnish the customer with a written statement 
identifying the payment as being in lieu of the dividend, tax-exempt 
interest, or other item. This section authorizes the Secretary to 
prescribe regulations that require brokers to file information returns 
that include the information contained in the written statement.
    Section 1.6045-2 of the existing Income Tax Regulations provides 
rules for reporting substitute payments under section 6045(d). In 
general, Sec.  1.6045-2(a)(3)(i) of the existing regulations excludes 
payments in lieu of dividends received by a broker on behalf of an 
individual from the broker reporting requirements of section 6045(d). 
Section 1.6045-2(a)(3)(ii) of the existing regulations requires 
reporting for certain dividend substitute payments received by a broker 
on behalf of an individual, such as payments in lieu of exempt interest 
dividends distributed by regulated investment companies.
    These regulations contain amendments to the existing regulations to 
require reporting under section 6045(d) for payments in lieu of 
dividends made to individuals on or after January 1, 2003. For taxable 
years beginning on or after January 1, 2003, brokers must use Form 
1099-MISC, ``Miscellaneous Income'', to report substitute payments to 
individuals, including payments in lieu of dividends.
    The IRS issued interim guidance regarding provisions of the JGTRRA 
that affect information reporting for payments in lieu of dividends in 
Notice 2003-67 (2003-40 I.R.B. 752). The notice also provided guidance 
on the definition of loanable shares and the allocation and selection 
of transferred shares (that is, shares giving rise to payments in lieu 
of dividends to customers). The IRS intends to issue comprehensive 
regulations amending Sec.  1.6045-2 in the future. The IRS anticipates 
that these regulations will define payments in lieu of dividends, 
provide rules for determining loanable shares, and provide rules for 
allocating and selecting transferred shares to customers. Pending 
issuance of further amendments to Sec.  1.6045-2 of the existing 
regulations, brokers may rely on Notice 2003-67 to comply with the 
requirements of the JGTRRA and section 6045(d).
    In addition, pending issuance of further amendments to Sec.  
1.6045-2, the IRS will permit brokers to continue to use the rules of 
Sec.  1.6045-2 of the existing regulations for allocating transferred 
shares to customers. A broker may continue to allocate transferred 
shares to shares of stock that the broker has borrowed under a security 
agreement with the customer. In addition, if a broker uses the lottery 
method of allocation and selection of loanable shares specified in 
Sec.  1.6045-2(f)(2)(ii), the broker may make the selection of the 
transferred shares within the individual pool described in Sec.  
1.6045-2(f)(2)(ii)(C) using the methods of selection of transferred 
shares used within the nonindividual pool as prescribed in Sec.  
1.6045-2(f)(2)(ii)(B).

Special Analyses

    These final regulations are necessary to provide brokers and 
taxpayers with immediate guidance regarding provisions in the JGTRRA 
that affect information reporting for substitute payments in lieu of 
dividends. The regulations apply to information returns required to be 
filed, and information statements required to be furnished, after 
December 31, 2003. Based on these considerations, it is determined that 
these final regulations will provide brokers and taxpayers with the 
necessary guidance and authority to comply with the tax laws. Because 
of the need for immediate guidance, notice and public procedure are 
impracticable and contrary to the public interest pursuant to 5 U.S.C. 
553(b)(B) and delayed effective date is not required pursuant to 5 
U.S.C. 553(d)(3).
    Because no notice of proposed rulemaking is required, the 
provisions of the Regulatory Flexibility Act, 5 U.S.C. 601 (et seq.) do 
not apply. Further, it has been determined that this Treasury decision 
is not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. Pursuant to 
section 7805(f) of the Code, these regulations were submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Michael Hara, Office 
of Associate Chief Counsel (Procedures and Administration), 
Administrative Provisions and Judicial Practice.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
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. 7805 * * *

0
Par. 2. Section 1.6045-2 is amended by:
0
1. Paragraph (a)(3)(i) is revised.
0
2. The heading for paragraph (a)(3)(ii) is revised.
    The revisions read as follows:


Sec.  1.6045-2  Furnishing statement required with respect to certain 
substitute payments.

    (a) * * *
    (3) * * * (i) In general. Except as otherwise provided in paragraph 
(a)(3)(ii) of this section, for taxable years beginning before January 
1, 2003, a broker that receives a substitute payment in lieu of a 
dividend on behalf of a customer who is an individual (``individual 
customer'') need not furnish a statement to the customer.
    (ii) Reporting for certain dividends. * * *
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: December 18, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-31671 Filed 12-24-03; 8:45 am]
BILLING CODE 4830-01-P