Section 871(m) Phase-In Extended Two More Years

On September 21, 2026, the Treasury Department and the IRS issued Notice 2026-61 (the “Notice”), further delaying the full implementation of the withholding rules on dividend equivalent payments. The Notice extends the phase-in of regulations under Section 871(m) of the Code (the “Regulations”) and related provisions until 2029. As background, Section 871(m) and the Regulations treat “dividend equivalents” paid or deemed paid under certain contracts as US-source dividends that are subject to withholding tax if deemed paid to a non-US person.

However, to date, the full scope and application of the Regulations have been curtailed by several IRS notices that have provided transition rules, phase-in periods, and deferred effective or applicability dates. Taxpayers have reasonably come to rely on the softened version of the rules, which were set to expire at the end of this year. With the Notice, these rules have now been extended six times for a period that covers more than a decade.¹

Based on public statements made by Treasury officials, it seems this may be the final notice offering transitional relief, and the guidance provided by the Regulations will be supplemented—or potentially replaced—with a new approach that will be described in forthcoming Treasury regulations.² The extent to which the Regulations will be updated or replaced, and the timing of their release, is currently unknown.

The Notice further extends (i) the phase-in for non-delta-one transactions; (ii) use of the simplified standard for determining whether transactions are “combined transactions” within the meaning of the Regulations; (iii) relief for qualified derivative dealers (“QDDs”); and (iv) the transition out of the qualified securities lender (“QSL”) regime. A summary of each is discussed below.

Phase-in for Non-Delta-One Transactions

Under previous IRS guidance (i.e., Notice 2024-44), the Regulations generally did not apply to any payments made with respect to non-delta-one transactions issued before January 1, 2027.³ The Notice extends this period to transactions issued through 2028. Note, however, that the Regulations continue to apply to any potential Section 871(m) transaction that is a delta-one transaction and was entered into on or after January 1, 2017.

The Notice also extends the periods for which enforcement standards established in prior IRS guidance (i.e., the good faith effort standard) will apply. In other words, the IRS will take into account the extent to which taxpayers have made a good faith effort to comply with the Regulations when enforcing the same with respect to (i) any delta-one transactions in 2017 through 2028 and (ii) any non-delta-one transaction in 2029.⁴

Simplified Standard for “Combined Transactions”

Prior IRS guidance provided a simplified standard for withholding agents to determine whether transactions entered into in 2017 through 2026 were combined transactions. The simplified standard requires the withholding agent to combine transactions for purposes of Section 871(m) only when the transactions are over-the-counter transactions that are priced, marketed, or sold in connection with each other (i.e., providing significant relief to withholding agents otherwise responsible for determining if separate transactions are otherwise entered into “in connection with each other”). The Notice extends the application of this simplified standard for determining whether transactions are “combined transactions” through 2028.⁵

Relief for QDDs

The Notice further extends the three QDD phase-ins that were delayed until 2027 by prior IRS guidance. Prior IRS guidance provided that a QDD (i) will not be subject to tax on dividends and dividend equivalents received in 2017 through 2026 in its equity derivatives dealer capacity or withholding on those dividends, including deemed dividends; (ii) would be required to compute its Section 871(m) tax liability using the net delta exposure method beginning in 2027; and (iii) is not required to perform a periodic review or provide the factual information in Appendix I of the 2023 QI Agreement with respect to QDD activities for 2017 through 2026. The Notice extends the withholding moratorium through 2028, provided that the QDD identifies the aforementioned dividends received in its equity derivative dealer capacity on its withholding statement in the same manner as required in the 2023 QI Agreement for 2023 and 2024. (Note this requirement was not previously extended by Notice 2024-44.) The Notice also extends the periodic review and information provision moratorium through 2028 and provides that QDDs will not be required to compute their section 871(m) amount using the net delta exposure method through 2028.

With respect to IRS enforcement and administration of the QDD rules, the Notice extends through 2028 the period during which the IRS will take into account the extent to which the QDD made a good faith effort to comply with the Regulations and the relevant provisions of the 2023 QI Agreement. In addition, the IRS will consider a QDD to satisfy the obligations that apply specifically to a QDD under its 2023 QI Agreement through 2028 provided that the QDD makes a good faith effort to comply with the relevant provisions of the 2023 QI Agreement, to the extent applicable to the QDD.

QSL Transition

As background, Notice 2010-46 contained an early IRS solution to potential overwithholding on a chain of dividends and dividend equivalents (i.e., where an intermediary is withheld upon and subsequently withholds on the same payment stream). The QSL regime provides for (i) an exception to withholding for payments to a QSL and (ii) a framework to credit forward prior withholding on a chain of dividends and dividend equivalents. The Notice further extends the QSL transition rules described in Notice 2010-46, Part III, Parts C, D and E to include payments made through 2028.

Looking Ahead

The Notice also reiterates that the Treasury Department and the IRS are continuing to evaluate Section 871(m) and the related provisions thereunder, and still welcome any additional comments regarding tax policy considerations, legal authority for, and the IRS administrative feasibility of, any suggested modifications to the Regulations. Taxpayers may rely on the Notice until (i) the Regulations are amended to reflect the extensions contained in the Notice, or (ii) the issuance of other guidance. As noted above, this may be the last transitional relief notice before additional Treasury regulations on these topics are issued.

 

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¹ The full suite of current IRS guidance on the Section 871(m) regulations is as follows:

• Notice 2010-46 containing the qualified securities lender (the “QSL”) regime, published in June 2010.
• Notice 2016-76 delaying the effective date of the Regulations, among other things, published in December 2016, and its corresponding final and temporary regulations published in January 2017.
• Notice 2017-42, providing a similar phase-in of the Regulations and related provisions, published in August 2017.
• Notice 2018-72, providing a similar phase-in of the Regulations and related provisions, published in October 2018.
• Notice 2020-2, providing a similar phase-in of the Regulations and related provisions, published in January 2020.
• Notice 2022-37, providing a similar phase-in of the Regulations and related provisions, published in September 2022.
• Revenue Procedure 2022-43 containing the final Qualified Intermediary Agreement (the “2023 QI Agreement”), published in December 2022.
• Notice 2024-44, providing a similar phase-in of the Regulations and related provisions, published in May 2024.

² Proposed Regulations for Dividend Equivalents Coming in 2026, Michael Smith, 190 Tax Notes Federal 2078 (Mar. 23, 2026).

³ For purposes of the Regulations, delta is intended to represent the measurement of how closely the returns of a derivative contract correlate with the performance of the underlying asset(s) referenced by the derivative contract. For example, a delta of one represents a perfect correlation, and a delta of zero represents no correlation at all.

⁴ Similarly, for purposes of IRS enforcement and administration of the QDD rules in the Regulations and the relevant provisions of 2023 QI Agreement, the Notice extends through 2028 the period during which the IRS will consider the extent to which a QDD makes a good faith effort to comply with the Regulations and the relevant provisions of the 2023 QI Agreement.

⁵ Transactions entered into in 2017 through 2028 that are combined transactions under this simplified standard will continue to be treated as such in future years, regardless of whether (i) a different outcome is produced under the Regulations or (ii) any portion(s) of the combined transaction is disposed. Transactions entered into in 2017 through 2028 that are not combined transactions under this simplified standard will not become combined transactions in the future by virtue of the Regulations, unless a triggering event occurs that causes the transactions to be retested under the Regulations.