Information-reporting guidance for payments in lieu of dividends.

• Author: Levy, Marc

Notice 2003-67 offers guidance to brokers and individuals on provisions in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) that affect information reporting for payments in lieu of dividends, effective Sept. 16, 2003.

Background

For tax years beginning after 2002 and before 2009, JGTRRA Section 302 reduces the tax rate for "qualified dividends" paid to individual shareholders to the capital gain rate. (For this purpose, "qualified dividends" do not include (1) "extraordinary dividends," (2) dividends with respect to certain foreign corporations and (3) certain dividends paid by mutual savings banks or on employee stock ownership plan securities.)

The reduced rate does not apply to a dividend on stock held by the taxpayer for 60 days or less of the 120-day period that begins 60 days before the ex-dividend date. Further, the reduced rate does not apply to the extent the taxpayer is obligated to make related payments (e.g., payments in lieu of dividends) for positions in substantially similar or related property.

The legislative history states that payments in lieu of dividends are not eligible for the reduced rate. Additionally, the Conference Report provides that the conferees intend for the IRS to exercise its authority under Sec. 6724(a) to waive penalties when brokers and dealers attempt in good faith to comply with the Secs. 6042 and 6045 information-reporting requirements, but are unable to reasonably do so because of the time needed to conform their information-reporting systems to the retroactive rate reductions on qualified dividends; see H. Conf. Rep't No. 108-26, 108th Cong., 1st Sess. (2003), pp. 42-43.

Penalty Waiver

Under Notice 2003-67, brokers who, in the normal course of a trade or business, engage in securities-lending transactions, short sales or other similar transactions for customers, are expected to immediately undertake action to conform their information-reporting systems to the JGTRRA. Brokers should complete their efforts to comply with the JGTRRA as soon as reasonably possible for calendar-year 2003 and, to the extent reasonably possible, to comply with their reporting responsibilities in a manner consistent with JGTRRA for payments in lieu of dividends for calendar-year 2003.

Notice 2003-67 states that the Service will exercise its authority under Sec. 6724(a) to waive penalties if the broker shows that it made a good-faith attempt to comply with the Secs. 6042 and 6045 information-reporting...