76262 Federal Register / Vol. 75, No. 235 / Wednesday, December 8, 2010 / Rules and Regulations 

Dated: December 1, 2010. 

Shaun Donovan, 

Secretary. 

[FR Doc. 2010–30843 Filed 12–7–10; 8:45 am] 

BILLING CODE 4210–67–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9508] 

RIN 1545–BJ85 

Source of Income From Qualified Fails 

Charges 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Temporary regulations. 

SUMMARY: This document contains 

temporary regulations which set forth 

the source of income attributable to 

qualified fails charges. The temporary 

regulations provide guidance about the 

treatment of fails charges for purposes of 

sections 871 and 881, which generally 

require gross-basis taxation of foreign 

persons not otherwise subject to U.S. 

net-basis taxation and the withholding 

of such tax under sections 1441 and 

1442. The text of the temporary 

regulations also serves as the text of the 

proposed regulations set forth in the 

notice of proposed rulemaking on this 

subject in the Proposed Rules section in 

this issue of the Federal Register. 

DATES: Effective Date. These regulations 

are effective on December 8, 2010. 

Applicability Date. These regulations 

apply to qualified fails charges paid or 

accrued on or after December 8, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Sheila Ramaswamy or Anthony J. Marra, 

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 (Treasury securities), a trading 

practice governing failed deliveries of 

Treasury securities was published in 

2008 by the Treasury Market Practices 

Group (TMPG) and the Securities 

Industry and Financial Markets 

Association (SIFMA). This trading 

practice, which was recommended by 

the Federal Reserve Bank of New York 

in addition to TMPG and SIFMA, has 

subsequently been voluntarily adopted 

by almost every participant in the 

Treasury securities market. Transactions 

that involve delivery-versus-payment 

include a sale, a purchase, a sale and 

repurchase transaction (commonly 

known as a ‘‘repo’’), a securities lending 

transaction, and an option. 

The trading practice addresses the 

problem that in certain situations, 

including a low interest rate 

environment, a party to a deliveryversus-payment transaction may lack 

the economic incentive to deliver 

Treasury securities in a timely manner. 

Under the trading practice, the parties to 

a contract that provides for deliveryversus-payment of Treasury securities 

agree that if one party fails to deliver 

Treasury securities at the time specified 

in the contract, the failing party will pay 

an amount (a ‘‘fails charge’’) to the party 

entitled to receive the Treasury 

securities. The fails charge is calculated 

using a formula that takes into account 

current interest rates and trade 

proceeds, and accrues each day that the 

failure to deliver continues. The trading 

practice is generally expected to impose 

a fails charge whenever the interest rate 

on a repo that can be settled with any 

of a variety of securities (referred to in 

the market as the ‘‘general collateral 

rate’’) falls below a certain level. 

As noted in this preamble, the 

delivery-versus-payment market 

encompasses a variety of transactions, 

each of which can generate a fails 

charge. Some transactions, such as a 

repo, where delivery is required both at 

inception and at settlement, can 

produce more than one fails charge. In 

back-to-back transactions, it can also be 

difficult to determine whether a party 

that incurs a fails charge is acting as an 

intermediary or a principal. As a result, 

there is considerable uncertainty about 

the treatment of fails charges for 

purposes of sections 871 and 881, which 

generally impose gross-basis taxation at 

a rate of 30 percent on certain U.S. 

source income of foreign persons that is 

not effectively connected with the 

conduct of a trade or business in the 

United States and the withholding of 

such tax under sections 1441 and 1442. 

Notice 2009–61, (2009 IRB 181), 

issued in July 2009, addressed the issue 

temporarily by providing that the 

Internal Revenue Service (IRS) will not 

challenge the position taken by a 

taxpayer or a withholding agent that a 

fails charge that is paid on or before 

December 31, 2010 is not subject to U.S. 

gross-basis taxation. Notice 2009–61 

further announced that the Treasury 

Department and the IRS were 

considering issuing prospective 

guidance on the circumstances, if any, 

that would cause a fails charge to be 

subject to U.S. gross-basis taxation. 

These temporary regulations provide 

further guidance on the treatment of 

fails charges. The text of the temporary 

regulations also serves as the text of the 

proposed regulations set forth in the 

notice of proposed rulemaking on this 

subject in the Proposed Rules section of 

this issue of the Federal Register. See 

§ 601.601(d)(2). 

Explanation of Provisions 

In order to provide certainty and 

consistency in the treatment of fails 

charges for purposes of sections 871, 

881, 1441 and 1442, these temporary 

regulations establish source rules for 

qualified fails charges that arise in the 

delivery-versus-payment market for 

Treasury securities. The temporary 

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 

that 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. 

The temporary regulations provide a 

source rule only for income from a 

qualified fails charge. In order to be a 

qualified fails charge, the fails charge 

must satisfy two requirements. First, it 

must be paid pursuant to a trading 

practice or similar guidance approved 

by a U.S. government agency or the 

Treasury Market Practices Group (which 

is sponsored by the Federal Reserve 

Bank of New York), or published in 

separate guidance by the IRS. Second, 

the transaction that generates the fails 

charge must be with respect to a bill, 

note, or other evidence of indebtedness 

issued by the United States Treasury 

Department. These temporary 

regulations do not address the source of 

any other type of damages payment, 

including a fails charge that is not a 

qualified fails charge. 

Although there is not currently a fails 

charge trading practice relating to 

securities other than Treasury securities, 

one may be considered in the future for 

agency securities (including mortgagebacked securities). If a fails charge 

trading practice pertaining to agency 

securities is endorsed by the Treasury 

Market Practices Group or an agency of 

the United States government and 

widely adopted, the Treasury 

Department and the IRS will consider 


jlentini on DSKJ8SOYB1PROD with RULES
Federal Register / Vol. 75, No. 235 / Wednesday, December 8, 2010 / Rules and Regulations 76263 

whether fails charges paid with respect 

to such a trading practice should be 

sourced under these regulations. 

Effective/Applicability Date 

These regulations apply to qualified 

fails charges 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. 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 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 

Internal Revenue Code, these temporary 

regulations will be submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal authors of these 

regulations are Sheila Ramaswamy and 

Anthony J. Marra, Office of the 

Associate Chief Counsel (International). 

However, other persons from the Office 

of Associate Chief Counsel 

(International) and the Treasury 

Department have 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 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 863(a) and 7805 

* * * 

■ Par. 2. Section 1.863–10T is added to 

read as follows: 

§ 1.863–10T Source of income from a 

qualified fails charge (temporary). 

(a) In general. Unless paragraph (b) or 

(c) of this section applies, 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 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 § 1.864– 

4(c)(5)(iii) (substituting ‘‘qualified 

business unit’’ for ‘‘U.S. office’’). 

(c) Effectively connected income 

exception. Income from a qualified fails 

charge that arises from a transaction that 

under the principles described in 

§ 1.864–4(c) is effectively connected 

with a United States trade or business 

shall be sourced in the United States 

and the income from the qualified fails 

charge shall be treated as effectively 

connected to the conduct of a United 

States trade or business to the same 

extent as the transaction from which it 

arises. 

(d) Definitions.—(1) Qualified fails 

charge. For purposes of this section, a 

qualified fails charge is a payment that 

(i) Compensates a party to a 

transaction that provides for delivery of 

a Treasury security in exchange for the 

payment of cash (delivery-versuspayment settlement) for another party’s 

failure to deliver the specified Treasury 

security on the settlement date specified 

in the relevant agreement; and 

(ii) Is made pursuant to: 

(A) 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 

(B) Any trading practice, program, 

policy or procedure approved by the 

Commissioner in guidance published in 

the Internal Revenue Bulletin. 

(2) Treasury security. For purposes of 

this section, a Treasury security is any 

bill, note, or other evidence of 

indebtedness issued by the United 

States Treasury Department. 

(e) Effective/applicability date. This 

section applies to qualified fails charges 

paid or accrued on or after December 8, 

2010. 

(f) Expiration date. This section 

expires on December 9, 2013. 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: December 2, 2010. 

Michael Mundaca, 

Assistant Secretary of the Treasury. 

[FR Doc. 2010–30895 Filed 12–7–10; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF JUSTICE 

Bureau of Prisons 

28 CFR Part 541 

[Docket No. BOP–1118–F] 

RIN 1120–AB18 

Inmate Discipline Program/Special 

Housing Units: Subpart Revision and 

Clarification 

AGENCY: Bureau of Prisons, Justice. 

ACTION: Final rule. 

SUMMARY: In this document, the Bureau 

of Prisons (Bureau) amends its Inmate 

Discipline and Special Housing Unit 

(SHU) regulations. We intend this 

amendment to streamline and clarify 

these regulations, eliminating 

unnecessary text and obsolete language, 

and removing internal agency 

procedures that need not be in 

regulations text. We also make 

substantive changes to our list of 

prohibited acts for which disciplinary 

sanctions may be imposed, and alter the 

list of possible sanctions available to 

allow Discipline Hearing Officers more 

flexibility in adapting the sanction to fit 

the seriousness of the violation. 

DATES: This rule is effective on March 1, 

2011. 

ADDRESSES: Rules Unit, Office of 

General Counsel, Bureau of Prisons, 320 

First Street, NW., Washington, DC 

20534. 

FOR FURTHER INFORMATION CONTACT: 

Sarah Qureshi, Office of General 

Counsel, Bureau of Prisons, phone (202) 

307–2105. 

SUPPLEMENTARY INFORMATION: The 

Bureau amends its inmate discipline 

and special housing unit (SHU) 

regulations (28 CFR part 541, subpart A 

and subpart B) to streamline and clarify 

these regulations, eliminating 

unnecessary text and obsolete language, 

and removing internal agency 

procedures that need not be in 

regulations text. The proposed 

regulation contained a detailed sectionby-section analysis (published on July 


jlentini on DSKJ8SOYB1PROD with RULES