Notice 2010-46

care that is provided to individuals eligible
for assistance under the organization’s financial assistance policy to not more than
the amounts generally billed to individuals who have insurance covering such care.
Section 501(r)(5) also prohibits the use of
gross charges.
The Technical Explanation states that
“[i]t is intended that amounts billed to
those who qualify for financial assistance may be based on either the best,
or an average of the three best, negotiated commercial rates, or Medicare rates.”
Technical Explanation at 82.
Section 5. BILLING AND
COLLECTION
Section 501(r)(6) requires a hospital organization to forego extraordinary collection actions against an individual before
the organization has made reasonable efforts to determine whether the individual
is eligible for assistance under the hospital
organization’s financial assistance policy.
The Technical Explanation states that
“extraordinary collections include lawsuits, liens on residences, arrests, body
attachments, or other similar collection
processes.” Technical Explanation at 82.
The Technical Explanation also states that
“[i]t is intended that for this purpose, ‘reasonable efforts’ includes notification by
the hospital of its financial assistance policy upon admission and in written and oral
communications with the patient regarding
the patient’s bill, including invoices and
telephone calls, before collection action or
reporting to credit agencies is initiated.”
Technical Explanation at 82.
Section 6. EFFECTIVE DATES
Section 501(r) (except for section
501(r)(3)), section 6033(b)(10), and section 6033(b)(15) apply to taxable years
beginning after March 23, 2010, the date
of enactment of the Affordable Care
Act. The CHNA requirements of section
501(r)(3) are effective for taxable years
beginning after March 23, 2012. The section 4959 excise tax for failure to satisfy
section 501(r)(3) is effective for failures
occurring after the date of enactment.
Section 7. REQUEST FOR COMMENTS
The IRS and the Department of Treasury request comments regarding the re-

June 14, 2010

quirements for hospital organizations described in this notice, including in particular the need, if any, for guidance regarding
such requirements. Comments are specifically requested regarding appropriate requirements for a CHNA, and what constitutes “reasonable efforts” to determine eligibility for assistance under a financial assistance policy for purposes of the billing
and collection requirements under section
501(r)(6). In addition, comments are requested regarding section 501(r)(2)(B)(ii),
which provides that an organization that
operates more than one hospital facility
“shall not be treated as described in [section 501(c)(3)] with respect to any such facility for which such requirements are not
separately met,” including the tax consequences of a failure with respect to some,
but not all, facilities and the proper tax
treatment in future periods in such a case.
Comments should refer to Notice
2010–39 and be submitted by July 22,
2010, to:
Internal Revenue Service
CC:PA:LPD:PR (Notice 2010–39)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Submissions may be hand delivered
Monday through Friday between the hours
of 8 a.m. and 4 p.m. to:
Courier’s Desk
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20224
Attn: CC:PA:LPD:PR
(Notice 2010–39)
Alternatively,
taxpayers
may
submit comments electronically to
[email protected].
Please include “Notice 2010–39”
in the subject line of any electronic
communications.
All comments will be available for public inspection and copying.
Section 8. DRAFTING INFORMATION
The principal author of this notice
is Garrett Gluth of the Exempt Organizations, Tax Exempt and Government
Entities Division. For further information

757

regarding this notice, contact Mr. Gluth at
(202) 283–9485 (not a toll-free call).

Prevention of
Over-Withholding and U.S. Tax
Avoidance With Respect to
Certain Substitute Dividend
Payments
Notice 2010–46
I. SUMMARY AND MODIFICATION
AND WITHDRAWAL OF NOTICE
97–66
A. Background
On October 14, 1997, final regulations
were published in the Federal Register (T.D. 8735, 1997–2 C.B. 72, 62 FR
53498 (1997)) (the “final regulations”)
that source substitute interest and substitute dividend payments made pursuant to
a securities lending transaction described
in § 1058 of the Internal Revenue Code
(“Code”) or a substantially similar transaction or a sale-repurchase transaction
(a “Securities Lending Transaction”) by
reference to the income that would be
earned with respect to the underlying
transferred debt security or stock. The
final regulations also provide that substitute interest and dividend payments that
are from sources within the United States
under the regulations are characterized
as interest and dividends for purposes of
determining the fixed or determinable annual or periodical income of nonresident
alien individuals and foreign corporations subject to tax under §§ 871(a), 881,
4948(a) and Chapter 3 of the Code and
for purposes of granting tax treaty benefits
with respect to interest and dividends. As
promulgated, the final regulations were
made applicable in all respects for substitute interest payments (as defined in
§ 1.861–2(a)(7)) and substitute dividend
payments (as defined in § 1.861–3(a)(6))
made after November 13, 1997.
Some taxpayers expressed concern that
the total U.S. gross-basis tax paid with
respect to a series of Securities Lending
Transactions (that is, a chain of related Securities Lending Transactions with respect
to identical securities) could be excessive
under the final regulations. For example, a

2010–24 I.R.B.

series of Securities Lending Transactions
could give rise to multiple substitute payments, each of which would be treated as
equivalent to a dividend under the final
regulations. If a dividend distribution on
the transferred security were U.S.-source
income, each substitute dividend payment
in the series would be treated as U.S.source income and potentially subject to
gross-basis taxation under §§ 871 and 881
and withholding of tax under §§ 1441 and
1442. Thus, a series of Securities Lending Transactions could result in “cascading” taxation that might, in the aggregate,
exceed 30 percent of the amount of the dividend distribution on the underlying transferred security.
To allow relief for taxpayers unable to
structure transactions to avoid excessive or
cascading taxation, the Treasury Department and the Service issued Notice 97–66,
1997–2 C.B. 328 (1997), on November
12, 1997. Notice 97–66 provides guidance that generally limits the aggregate
U.S. gross-basis tax on a series of Securities Lending Transactions to no more than
30 percent of the amount equivalent to
the dividend distribution on the underlying transferred security. To implement this
limitation, Notice 97–66 provides a formulary method to calculate the amount of
U.S. tax to be imposed on a foreign-to-foreign substitute dividend payment. Under
this method,
the amount of U.S. withholding tax to
be imposed under §§ 1.871–7(b)(2) and
1.881–2(b)(2) with respect to a foreignto-foreign payment will be the amount
of the underlying dividend multiplied
by a rate equal to the excess of the
rate of U.S. withholding tax that would
be applicable to U.S. source dividends
paid by a U.S. person directly to the recipient of the substitute payment over
the rate of U.S. withholding tax that
would be applicable to U.S. source dividends paid by a U.S. person directly to
the payor of the substitute payment.
The following example demonstrates
the operation of this rule. If a borrower
that is eligible under an income tax treaty
for a reduced rate of tax equal to 15 percent
on U.S.-source dividends makes a substitute dividend payment to a lender that is
resident in a non-treaty jurisdiction sub-

ject to a tax of 30 percent on U.S.-source
dividends, the amount of tax imposed
on the substitute dividend payment under §§ 1.871–7(b)(2) and 1.881–2(b)(2)
generally would be limited to 15 percent
(i.e., the payee’s tax rate of 30 percent less
the payor’s rate of 15 percent). Notice
97–66 also provides in an example that
if the securities lender’s tax liability has
already been reflected in prior withholding within a series of Securities Lending
Transactions, the borrower, as a withholding agent, is permitted to reduce the
lender’s liability by such amount.
It has been widely reported that some
taxpayers have relied on Notice 97–66 to
avoid U.S. gross-basis taxation of foreign
lenders of U.S. dividend-paying stocks in
transactions undertaken primarily to enhance the after-tax yield of U.S. dividendpaying stocks held by foreign persons.1
On March 18, 2010, the Hiring Incentives to Restore Employment Act, Pub.
L. No. 111–147, 124 Stat. 71 (2010)
(“HIRE Act”) was enacted. Section 541
of the HIRE Act added new § 871(l) to
the Code, which provides that certain dividend equivalent payments are treated as
U.S.-source dividends, effective for payments made on or after the date that is
180 days after the date of enactment. The
term “dividend equivalent” is defined for
this purpose to include “any substitute dividend made pursuant to a securities lending or sale-repurchase transaction that (directly or indirectly) is contingent upon, or
determined by reference to, the payment of
a dividend from sources within the United
States.” § 871(l)(2)(A). Section 871(l)(6)
authorizes the Secretary to reduce tax with
respect to a chain of dividend equivalents
“but only to the extent that the taxpayer can
establish that such tax has been paid with
respect to another dividend equivalent in
such chain, or is not otherwise due, or as
the Secretary determines is appropriate to
address the role of financial intermediaries
in such chain.”
B. Modification and Withdrawal of Notice
97–66
Notice 97–66 is withdrawn effective for payments made on or after
September 14, 2010 (the effective date
of § 871(l)). Prior to September 14,

2010, taxpayers may continue to rely on
Notice 97–66, except that Notice 97–66
is modified as follows: a withholding
agent or foreign lender may not rely
on Notice 97–66 when the withholding
agent or foreign lender knows or has
reason to know that a Securities Lending
Transaction, or series of such transactions,
has a principal purpose of reducing or
eliminating the amount of gross-basis tax
that would have been due in the absence
of such transaction or transactions. For
example, a person may not rely on Notice
97–66 to reduce or eliminate the amount
of U.S. tax on the substitute dividend
it is obligated to pay the foreign lender
when it structures or participates in an
arrangement whereby it: (1) borrows
shares of a domestic corporation from a
foreign person in a transaction described
in § 1058 after a dividend declaration; (2)
sells that stock to a related U.S. person
before the ex-dividend date; and (3) enters
into a total return swap agreement with that
related person in order to hedge its risk.
No inference is intended as to whether any
transaction entered into prior to May 20,
2010, is eligible for the relief described
in Notice 97–66, and the Service may
challenge transactions under existing law,
including by applying existing judicial
doctrines, as appropriate.
II. PROPOSED WITHHOLDING AND
REPORTING FRAMEWORK
The Treasury Department and the Service intend to issue regulations exercising
the authority described in § 871(l)(6).
These regulations will coordinate the
tax imposed on substitute payments under § 871(l) and §§ 1.871–7(b)(2) and
1.881–2(b)(2) with the withholding and reporting requirements under §§ 1441, 1442
and 1461 and the regulations thereunder to
ensure that the appropriate amount of tax
is paid and reported. Generally, the regulations, as described below, are expected
to replace the formulary approach previously adopted by Notice 97–66 with a
documentation-based system under which
withholding agents will be able to reduce
withholding to the extent that withholding
is shown to have been made on another
substitute payment or dividend with respect to identical securities. Additionally,

1 See STAFF OF S. PERMANENT SUBCOMM. ON INVESTIGATIONS, 110TH CONG., REPORT ON DIVIDEND TAX ABUSE: HOW OFFSHORE ENTITIES DODGE TAXES ON
U.S. STOCK DIVIDENDS (COMM. PRINT 2008).

2010–24 I.R.B.

758

June 14, 2010

to reduce instances of potential excessive or cascading taxation and to properly
account for the role of financial intermediaries in Securities Lending Transactions,
this proposed system is expected to exempt
certain financial institutions from being
subject to withholding at source on receipt
of substitute dividend payments provided
that they assume responsibility and liability for properly withholding, reporting,
depositing, and paying U.S. tax with respect to substitute dividend payments.
This system will also permit the Service
to administer compliance by market participants more effectively by disqualifying
noncompliant taxpayers from eligibility
for the relief provided in this notice in
appropriate cases.
A. Substitute Dividend Payments to a
“Qualified Securities Lender”
Treatment of Withholding Agent. The
regulations are expected to provide that
a withholding agent making a substitute
dividend payment to a financial institution
that meets the regulatory definition of a
Qualified Securities Lender will not be required to withhold U.S. tax with respect
to such payment. Part 2.A.ii describes
the certifications required to be made by a
Qualified Securities Lender to a withholding agent in order to relieve a withholding
agent of its obligation to withhold on a substitute dividend.
Treatment of Qualified Securities
Lender. The regulations will coordinate
the obligation of a Qualified Securities
Lender to withhold on substitute dividend
payments that it makes, pay and deposit
tax on substitute dividends it receives, and
report on substitute dividends it makes
(on behalf of itself or any other person).
The regulations are expected to define
these obligations in terms of two distinct
categories of substitute dividends that
Qualified Securities Lenders pay or receive.
In circumstances where a Qualified
Securities Lender receives a substitute
dividend payment (the “first substitute
dividend payment”) and is obligated to
make an offsetting substitute dividend
payment with respect to identical securities (the “second substitute dividend
payment”), the regulations are expected to
provide that a Qualified Securities Lender:
(A) will not be liable for U.S. gross-basis

June 14, 2010

tax on the first substitute dividend payment under § 871(a) or 881(a); and (B)
must properly withhold under §§ 1441 and
1442 and report with respect to the second
substitute dividend payment.
In circumstances where a Qualified Securities Lender receives a substitute dividend payment for which it has no obligation to make an offsetting substitute dividend payment with respect to identical securities, the Qualified Securities Lender
remains liable for tax under § 871(a) or
881(a) by virtue of the receipt of such substitute dividend payment.
The Service intends to monitor Qualified Securities Lenders for compliance
with all applicable rules described in this
notice and may revoke an institution’s
status as a Qualified Securities Lender
for noncompliance. Such noncompliance
may include, for example, circumstances
in which an institution structures or participates in arrangements designed to
facilitate the avoidance of U.S. gross-basis taxation by foreign persons that hold
or held U.S. equities, as well as circumstances in which an institution does not
withhold and deposit tax at the proper rate
when it acts as a custodian on behalf of
both a borrower and lender in the same
Securities Lending Transaction.
i. Definition of Qualified Securities
Lender
For purposes of the relief described
above, the regulations are expected to
provide that a foreign financial institution
is a Qualified Securities Lender only if it
satisfies all of the following conditions:

•

•

it is a bank, custodian, broker-dealer,
or clearing organization that is subject to regulatory supervision by a governmental authority in the jurisdiction
in which it was created or organized,
and is regularly engaged in a trade or
business that includes the borrowing
of securities of domestic corporations
(as defined in § 7701(a)(4)) from, and
lending of securities of domestic corporations to, its unrelated customers;
it is subject to audit by the Service under § 7602 or, in the case of a Qualified Intermediary (QI) that appropriately amends its QI agreement with the
Service, by an external auditor. Further
guidance will specify the requirements

759

•

of such an amendment to the QI agreement. In general, however, the amendment will require the QI to report, withhold, deposit, and pay U.S. tax as described in Parts II.A and D of this notice; and
it files an annual statement on a form
prescribed by the Service certifying
that it satisfies the conditions necessary to be a Qualified Securities
Lender.

ii. Certifications by a Qualified Securities
Lender
As noted above, the regulations are expected to relieve a withholding agent of its
liability to withhold U.S. tax with respect
to any substitute dividend paid to a Qualified Securities Lender only if the withholding agent receives a written certification from the Qualified Securities Lender,
either on a form prescribed by the Service or as otherwise provided by regulation. This certification must include a
statement that the recipient of a substitute
dividend is a Qualified Securities Lender
and that, with respect to any substitute
dividend it receives from the withholding
agent, it will withhold and remit or pay
the proper amount of U.S. gross-basis tax
with respect to substitute dividend payments that it receives or makes.
B. Credit Forward of Prior Withholding
The Treasury Department and the Service believe that the vast majority of instances of excessive or cascading taxation
will be relieved through the Qualified Securities Lender rules described above. To
address remaining instances of excessive
or cascading taxation not addressed by the
Qualified Securities Lender rules, the regulations are expected to provide a credit
forward system, as described below.
i. Availability of credit for prior
withholding
The regulations are expected to provide
that withholding agents may limit the aggregate U.S. gross-basis tax within a series of Securities Lending Transactions to
the amount of U.S. gross-basis tax, if any,
applicable to the foreign taxpayer (other
than in the case of a Qualified Securities
Lender that is obligated to make an offsetting substitute dividend payment) bearing

2010–24 I.R.B.

the highest rate of U.S. gross-basis tax on
either a substitute or actual dividend with
respect to the underlying security transferred in the series. As a result, the aggregate taxes paid in such transactions should
not exceed the 30 percent statutory rate applicable to U.S.-source dividends paid to
foreign persons. The regulations are expected to provide that withholding agents
may relieve excessive tax on substitute
dividends by reducing withholding on a
substitute dividend payment that the withholding agent is obligated to make by an
amount not to exceed the amount that has
been previously withheld within the same
series of Securities Lending Transactions,
but only to the extent that there is sufficient evidence that tax was actually withheld on a prior dividend and/or substitute
dividend paid to the withholding agent or
a prior withholding agent within the same
such series. No payee in a series of Securities Lending Transactions may claim a
refund (or claim a credit against any other
liability) solely because a prior payee in
the same series was subjected to a higher
rate of gross-basis U.S. tax. Moreover, no
taxpayer or withholding agent in a series
of Securities Lending Transactions may
credit any tax withheld with respect to a
substitute dividend payment in such series
against any tax imposed with respect to a
substitute dividend payment in a different
series of Securities Lending Transactions.

cipient of the payment against which such
tax was withheld; and (4) does not know
or have reason to know that the written
statement is unreliable. For these determinations, a withholding agent may not rely
upon evidence of a sale of the underlying
security as a basis to determine that tax
has been paid or withheld.

ii. Substantiation of Prior Withholding

In cases in which a withholding agent
(including a Qualified Securities Lender)
makes a substitute dividend payment and,
in reliance on the regulations, (1) reduces
the withholding or (2) is exempted from
withholding, the withholding agent should
include on Form 1042 and Form 1042–S:
(a) the gross amount of the substitute dividend to which the recipient would have
otherwise been entitled before consideration of any withholding tax obligations;
and (b) the amount of tax withheld by the
withholding agent and shown to have been
withheld by other withholding agents in
the series of Securities Lending Transactions based on the documentation and information as described above. In addition,
a withholding agent (including a Qualified
Securities Lender) that makes a substitute
dividend payment to a United States person as defined in § 7701(a)(30) will be required to report and withhold to the extent
required under Chapter 61 and § 3406.

The regulations are expected to provide
that sufficient evidence of prior withholding will be deemed to exist where there
is written documentation that identifies
amounts previously withheld by another
withholding agent with respect to actual
dividend distributions or substitute dividends in the same series of Securities
Lending Transactions or as otherwise prescribed by the Service in future guidance.
For example, the regulations are expected
to provide that a withholding agent may
presume that tax has been withheld by
a prior withholding agent in a series of
Securities Lending Transactions if that
agent: (1) receives a substitute dividend
net of U.S. withholding taxes; (2) receives
a written statement from the immediately
prior withholding agent setting out the
amount of such taxes; (3) identifies the
person who withheld such tax and the re-

2010–24 I.R.B.

C. Anti-Abuse
Finally, the regulations are expected
to provide that a withholding agent or a
Qualified Securities Lender may not rely
on any of the foregoing rules (including
any certifications provided by a Qualified
Securities Lender) when the withholding agent or Qualified Securities Lender
knows or has reason to know that a Securities Lending Transaction, or series of
such transactions, has a principal purpose
of reducing or eliminating the amount of
U.S. gross-basis tax that would have been
due in the absence of such transaction or
transactions. In such a case, a withholding agent or Qualified Securities Lender
must withhold, and the recipient of such
payment is subject to U.S. gross-basis tax,
at 30 percent (subject to reduction under
an applicable income tax treaty) on each
substitute dividend payment with respect
to such transaction.
D. Other Considerations—Information
Reporting of Substitute Payments

760

III. TRANSITION RULE
A. Summary and General Transition Rule
The Treasury Department and the Service anticipate that the regulatory framework outlined in Part II of this notice will
be effective for transactions entered into on
or after January 1, 2012. Until such regulations are issued, and after September 14,
2010 (the “transition period”), § 871(l) will
apply with the potential for U.S. tax due
on a series of Securities Lending Transactions that exceeds 30 percent in the aggregate. In order to avoid excessive or cascading tax in these situations, withholding
agents may rely on the transition rules described in this Part.
Generally, the transition rules described
in this Part III provide that the maximum
aggregate U.S. gross-basis tax due, if any,
with respect to a series of Securities Lending Transactions and any related dividend
payment is the amount determined by the
tax rate paid by the foreign taxpayer (other
than in the case of a Qualified Securities
Lender that is obligated to make an offsetting substitute dividend payment) bearing the highest rate of U.S. gross-basis
tax in the series. Accordingly, the aggregate U.S. gross-basis taxes paid in such
transactions generally should not exceed
the 30 percent statutory rate applicable to
U.S.-source dividends paid to foreign persons.
B. Receipt of Net Payments
A withholding agent that is obligated to
make a substitute dividend payment pursuant to a Securities Lending Transaction
may presume that U.S. tax has been paid
in an amount equal to the amount implied
by the net payment if all of the following
are satisfied:

•

•

The withholding agent receives a substitute dividend or dividend payment
with respect to identical securities that
reflects a reduction for withholding of
U.S. gross-basis tax;
The withholding agent does not know
or have reason to know that tax was not
withheld and deposited or paid. For
this purpose, a withholding agent has a
reason to know that tax was not withheld if, for example, the amount of
any lending fee or similar fee is increased directly or indirectly, in whole

June 14, 2010

•

or in part, by the difference between
the gross amount of the substitute dividend and the net amount received; and
The withholding agent is a person subject to audit under § 7602, or in the case
of a QI, by an external auditor.

No payee in a series of Securities Lending Transactions may claim a refund (or
claim a credit against any other liability)
solely because a prior payee in the same series was subjected to a higher rate of grossbasis U.S. tax. Moreover, no taxpayer or
withholding agent in a series of Securities
Lending Transactions may credit any tax
withheld with respect to a substitute dividend payment in such series against any
tax imposed with respect to a substitute
dividend payment in a different series of
Securities Lending Transactions.
C. Application of Qualified Securities
Lender Rules
During the transition period, withholding agents may adopt a system that
reasonably implements the principles of
the Qualified Securities Lender system
described in Part II of this notice. In
particular, during the transition period, a
withholding agent is not required to withhold on a substitute dividend payment
made to a Qualified Securities Lender if
the withholding agent receives, at least
annually, a statement from its counterparty that substantially complies with the
certification requirement described in Part
II.A.ii of this notice. A financial institution may make such a certification only
if it reasonably determines that it meets
the requirements to qualify as a Qualified Securities Lender described in Part
II.A.i of this notice (without regard to
the requirement that a Qualified Securities Lender file an annual statement with
the Service). It is anticipated that future
guidance will provide that all Qualified
Securities Lenders taking advantage of
the transition relief described in this Part
may be required to identify themselves to
the Service (in a manner to be specified)
before the end of calendar year 2010. A
QI that provides such a certification will
be deemed to have agreed to amend its QI
agreement for these purposes as necessary
to report, withhold, deposit, and pay U.S.
tax as described in Part II.A of this notice.

June 14, 2010

D. Anti-Abuse
Withholding agents may not rely on the
transition relief described in Part III of this
notice with respect to a Securities Lending
Transaction or series of such transactions
that are entered into with a principal purpose of reducing or eliminating the aggregate amount of U.S. tax that would have
been due in the absence of such transaction or series of transactions. A financial
institution that is determined to have structured or engaged in one or more transactions described in the preceding sentence
on or after May 20, 2010, will not qualify
as a Qualified Securities Lender for a period of 5 years from the date of such determination.
E. Other Considerations
A Qualified Securities Lender may use
any reasonable method, consistently applied, to determine which securities within
a pool of fungible securities available to
borrow have actually been borrowed and
lent.
Withholding agents will be required to
perform information reporting as specified
in Part II.D above.
F. Extensions
The Treasury Department and the Service believe that administrative relief is appropriate to ensure that withholding agents
have sufficient time to make the operational changes necessary to comply with
§ 541 of the HIRE Act and the provisions
of this notice. Therefore, to the extent
that § 871(l) applies to any substitute dividend payments in respect of any transaction described in § 871(l)(2)(A), withholding agents are hereby granted an automatic
six-month extension of time to file information returns pursuant to § 1.1461–1(c)
with respect to the calendar year 2010.
However, the time for filing information
returns pursuant to § 1.1461–1(c) shall not
be extended beyond the date on which the
withholding agent provides a copy of the
return to the recipient. In addition, withholding agents are hereby granted an automatic extension for making deposits of
withheld tax from such substitute dividend
payments until January 31, 2011, for the
calendar year 2010. The Treasury Department and the Service believe that the administrative relief provided by this notice

761

is in the best interests of sound tax administration.
IV. EFFECTIVE DATES
The modification of Notice 97–66 described in Part I is effective for amounts
paid on or after May 20, 2010 and before September 14, 2010. The transition
rules described in Part III are effective for
amounts paid on or after September 14,
2010.
V. PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1566.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number.
The collection of information contained
in this notice is in Part III. The information is required to prevent excessive taxation under §871(l) during the transition
period. The information will be used for
the same purpose described in the preceding sentence. The collections of information are required to obtain a benefit. The
likely respondents are businesses or other
for-profit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 1,000
hours.
The estimated annual burden per respondent/recordkeeper varies from 1
minute to 15 minutes, depending on individual circumstances, with an estimated
average of 10 minutes. The estimated
number of respondents and/or recordkeepers is 6,000.
The estimated frequency of responses
(used for reporting requirements only) is
once.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.

2010–24 I.R.B.

VI. EFFECT ON OTHER DOCUMENTS
Notice 97–66 is modified as provided in
Part I.
VII. REQUEST FOR COMMENTS
The Treasury Department and the Service invite comments on the guidance described in this notice. In particular, comments are requested on the following issues.
1.
2.

3.

4.

5.

6.

The definition of a Qualified Securities Lender.
The treatment of substitute dividends
paid to a Qualified Securities Lender
where that entity holds the relevant
position in a proprietary account.
Whether additional rules are required
to address abusive Securities Lending
Transactions that avoid U.S. tax in addition to the anti-abuse regulation described above.
The treatment of substitute dividends
paid with respect to securities transferred from a commingled account
containing securities held by a Qualified Securities Lender in its proprietary capacity and other securities
held in connection with transactions
for customers.
Whether a Qualified Intermediary
with Qualified Securities Lender status (a “Lender QI”) should be required to provide the withholding
rate pool information of its customers
to another Qualified Intermediary (a
“Borrower QI”) that has borrowed
securities in a Securities Lending
Transaction. Whether a Borrower QI
should be required to withhold and
carry out information reporting on a
substitute dividend payment made to
a Lender QI based upon the withholding information provided by a Lender
QI with respect to its customers.
The definition of a series of Securities Lending Transactions, and how
related securities loans in a series
should be identified, including appropriate methods pursuant to which
a Qualified Securities Lender may
determine which securities within a
pool of fungible securities are attributable to particular Securities Lending
Transactions.

2010–24 I.R.B.

The principal authors of this notice are
Peter Merkel and John Sweeney of the Office of Associate Chief Counsel (International). For further information regarding
this notice, contact Peter Merkel or John
Sweeney at (202) 622–3870 (not a toll-free
call).

26 CFR 601.601: Rules and regulations.
(Also Part I, §§ 25, 103, 143; 1.25–4T, 1.103–1,
6a.103A–2.)

Rev. Proc. 2010–23
SECTION 1. PURPOSE
This revenue procedure provides guidance with respect to the United States and
area median gross income figures that are
to be used by issuers of qualified mortgage
bonds, as defined in § 143(a) of the Internal Revenue Code, and issuers of mortgage
credit certificates, as defined in § 25(c), in
computing the housing cost/income ratio
described in § 143(f)(5).
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, except as provided in § 103(b), gross income
does not include interest on any state or
local bond. Section 103(b)(1) provides
that § 103(a) shall not apply to any private activity bond that is not a qualified
bond (within the meaning of § 141). Section 141(e) provides that the term “qualified bond” includes any private activity
bond that (1) is a qualified mortgage bond,
(2) meets the applicable volume cap requirements under § 146, and (3) meets the
applicable requirements under § 147.
.02 Section 143(a)(1) provides that the
term “qualified mortgage bond” means a
bond that is issued as part of a “qualified
mortgage issue”. Section 143(a)(2)(A)
provides that the term “qualified mortgage issue” means an issue of one or more
bonds by a state or political subdivision
thereof, but only if (i) all proceeds of the
issue (exclusive of issuance costs and a
reasonably required reserve) are to be used
to finance owner-occupied residences; (ii)
the issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), (i), and
(m)(7) of § 143; (iii) the issue does not
meet the private business tests of paragraphs (1) and (2) of § 141(b); and (iv)

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with respect to amounts received more
than 10 years after the date of issuance,
repayments of $250,000 or more of principal on financing provided by the issue
are used not later than the close of the first
semi-annual period beginning after the
date the prepayment (or complete repayment) is received to redeem bonds that are
part of the issue.
.03 Section 143(f) imposes eligibility
requirements concerning the maximum
income of mortgagors for whom financing
may be provided by qualified mortgage
bonds. Section 25(c)(2)(A)(iii)(IV) provides that recipients of mortgage credit
certificates must meet the income requirements of § 143(f). Generally, under
§§ 143(f)(1) and 25(c)(2)(A)(iii)(IV),
these income requirements are met only
if all owner-financing under a qualified
mortgage bond and all certified indebtedness amounts under a mortgage credit
certificate program are provided to mortgagors whose family income is 115 percent
or less of the applicable median family
income. Under § 143(f)(6), the income
limitation is reduced to 100 percent of the
applicable median family income if there
are fewer than three individuals in the
family of the mortgagor.
.04 Section 143(f)(4) provides that the
term “applicable median family income”
means the greater of (A) the area median
gross income for the area in which the residence is located, or (B) the statewide median gross income for the state in which the
residence is located.
.05 Section 143(f)(5) provides for an
upward adjustment of the income limitations in certain high housing cost areas.
Under § 143(f)(5)(C), a high housing
cost area is a statistical area for which
the housing cost/income ratio is greater
than 1.2. The housing cost/income ratio
is determined under § 143(f)(5)(D) by
dividing (a) the applicable housing price
ratio by (b) the ratio that the area median
gross income bears to the median gross
income for the United States. The applicable housing price ratio is the new housing
price ratio (new housing average purchase
price for the area divided by the new housing average purchase price for the United
States) or the existing housing price ratio
(existing housing average area purchase
price divided by the existing housing average purchase price for the United States),
whichever results in the housing cost/in-

June 14, 2010