53498 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

§ 513.4 Patent and copyright royalties and

film rentals.

The provisions of § 513.2 relating to

the degree of liability to Irish tax in the

case of dividends are equally applicable

with respect to the income falling

within the scope of this section.

§ 513.5 Natural resource royalties and real

property rentals.

The provisions of § 513.2 relating to

the degree of liability to Irish tax in the

case of dividends are equally applicable

with respect to the income falling

within the scope of this section.

PART 514—FRANCE

Par. 76. The authority citation for part

514 is added to read as set forth below

and the authority citation preceding

§ 514.1 is removed.

Authority: 26 U.S.C. 7805.

Par. 77. Part 514 is amended as

follows:

1. The undesignated centerheading

preceding § 514.1 is removed.

§§ 514.20 and 514.21 [Removed]

2. Sections 514.20 and 514.21 are

removed.

§ 514.22 [Amended]

3. In § 514.22, paragraph (c) is

removed.

§§ 514.23 through 514.32 [Removed]

4. Sections 514.23 through 514.32 are

removed.

§§ 514.101 through 514.117 [Removed]

5. Subpart—General Income Tax

consisting of sections 514.101 through

514.117 is removed.

PART 516—[REMOVED]

Par. 78. Part 516 is removed.

PART 517—[REMOVED]

Par. 79. Part 517 is removed.

PART 520—[REMOVED]

Par. 80. Part 520 is removed.

PART 521—[AMENDED]

Par. 81. The authority citation for part

521 is revised to read as follows:

Authority: 26 U.S.C. 62, 143, 144, 211, and

231.

Par. 82. Part 521 is amended as

follows:

§§ 521.1–521.8 [Removed]

1. Subpart—Withholding of Tax

consisting of §§ 521.1 through 521.8 is

removed.

§ 521.103 [Amended]

2. In § 521.103, paragraph (d) is

removed and reserved.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 83. The authority for part 602

continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 84. In § 602.101, paragraph (c) is

amended by:

1. Removing the following entries

from the table:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.1441–8T ................................. 1545–1053

* * * * *

1.1461–3 ................................... 1545–0054

1545–0055

1545–0096

1545–0795

1.1461–4 ................................... 1545–0054

1545–0055

1545–0096

* * * * *

35a.9999–3 ............................... 545–0112

* * * * *

Part 502 .................................... 1545–0844

Part 503 .................................... 1545–0837

* * * * *

Part 516 .................................... 1545–0841

Part 517 .................................... 1545–0849

Part 520 .................................... 1545–0833

* * * * *

2. Adding entries in numerical order

to the table to read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.1441–1 ................................... 1545–1484

1.1441–4 ................................... 1545–1484

* * * * *

11.1441–8 ................................. 1545–1484

1545–1053

1.1441–9 ................................... 1545–1484

* * * * *

31.3401(a)(6) ............................ 1545–1484

301.6114–1 ............................... 1545–1484

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

3. Revising entries in the table to read

as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.1441–5 ................................... 1545–0096

1545–0795

1545–1484

1.1441–6 ................................... 1545–0055

1545–0795

1545–1484

* * * * *

1.1461–1 ................................... 1545–0054

1545–0055

1545–0795

1545–1484

* * * * *

301.6402–3 ............................... 1545–0055

1545–0073

1545–0091

1545–0132

1545–1484

* * * * *

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: August 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–25998 Filed 10–6–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8735]

RIN 1545–AP71

Certain Payments Made Pursuant to a

Securities Lending Transaction

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

Income Tax Regulations relating to the

taxation of certain payments made

pursuant to a cross-border securities

lending transaction. These regulations

provide guidance concerning the source,

character, and income tax treaty

treatment of such payments and affect
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53499

United States payors and recipients and

foreign payors and recipients.

DATES: These regulations are effective

October 14, 1997.

Applicability: These regulations are

applicable to payments made after

November 13, 1997.

FOR FURTHER INFORMATION CONTACT:

Ramon Camacho or Paul Epstein at

(202) 622–3870 (not a toll-free number)

of the Office of Associate Chief Counsel

(International), within the Office of

Chief Counsel, Internal Revenue

Service, 1111 Constitution Avenue,

NW., Washington, DC 20224.

SUPPLEMENTARY INFORMATION:

Background

On January 9, 1992, the IRS published

proposed amendments (INTL–106–89)

to the Income Tax Regulations (26 CFR

part 1) under sections 861, 871, 881,

894, and 1441 of the Internal Revenue

Code of 1986 (Code) in the Federal

Register (57 FR 860). A public hearing

was scheduled but was subsequently

cancelled because no one requested to

testify. However, several written

comments were received. After

consideration of all of the comments,

the regulations proposed by INTL–106–

89 are adopted by this Treasury

decision, as modified.

Explanation of Provisions

I. The 1992 Proposed Regulations

On January 9, 1992, the Internal

Revenue Service (IRS) issued proposed

regulations that provided guidance on

the source and character of substitute

payments made in cross-border

securities lending transactions. In

general, the regulations proposed to

source substitute payments by reference

to the source of the payments (dividend

or interest) for which they substitute. In

addition, the regulations proposed to

characterize substitute payments under

a transparency rule. Under the

transparency rule, substitute payments

are treated as having the same character

as the dividend or interest income for

which they substitute.

Under the proposed regulations, the

source rule applies for all purposes of

the Code in cross-border securities

lending transactions. In contrast, the

transparency rule addressing the

character of substitute payments applies

only for purposes of determining the tax

liability under sections 871 and 881 and

nonresident alien withholding under

chapter 3 of the Code and for treaty

purposes. Generally, public comments

welcomed the transparency rule because

it eliminated unjustifiable tax biases

between similar economic investments.

After considering all the public

comments, the proposed regulations are

adopted as final regulations by this

Treasury decision, substantially as

proposed.

II. The Final Regulations

1. General rule

The final regulations, like the

proposed regulations, provide that a

substitute payment made with respect to

a securities lending or sale-repurchase

transaction is sourced using the general

rules governing the source of interest or

dividend income contained in sections

861 and 862. The definitions of

securities lending transactions and salerepurchase transactions are provided in

§§ 1.861–2(a)(7) and 1.861–3(a)(6) of the

regulations. These provisions define a

substitute payment as a payment made

to the transferor of a security of an

amount equal to any distributions of

dividends or interest which the owner

of the transferred security would

normally receive. The regulations also

provide that substitute interest or

dividend payments have the same

character as interest or dividend

income, respectively, for purposes of

applying sections 864(c)(4)(B), 871, 881,

894, 4948(a) and the withholding

provisions under chapter 3 of the

Internal Revenue Code.

2. Scope of regulation

Some commentators questioned

whether a sale-repurchase transaction is

considered a transaction that is

substantially similar to a securities

lending transaction for purposes of the

proposed regulations. They noted that

most sale-repurchase transactions

contractually permit the purchaser to

deal freely with the underlying

securities, specifying only that

substantially identical securities be

returned on the repurchase date. In such

cases the purchaser must also make

substitute payments to the seller. The

final regulations clarify that substitute

payments made in a sale-repurchase

transaction are sourced and

characterized in the same manner that

substitute payments are sourced and

characterized in securities lending

transactions.

The final regulations only address the

tax treatment of substitute payments

received by the transferor in securities

lending or sale-repurchase transactions.

The regulations do not address the

treatment of fees or interest paid to the

transferee in such transactions. For

example, the transparency rule does not

extend to characterize the interest

component of the repurchase price of a

sale-repurchase agreement, which is

treated as interest and sourced under

the general source rules for interest

contained in sections 861 and 862. See

Rev. Rul. 74–27 (1974–1 C.B. 24); Rev.

Rul. 77–59 (1977–1 C.B. 196); Nebraska

Department of Revenue v. Loewenstein,

115 S. Ct. 557 (1994).

In response to comments, the final

regulations apply for purposes of

determining the source of substitute

payments, regardless of whether the

recipient of the income is U.S. or

foreign. When source is determined

under these regulations, it applies for all

purposes of the Code (e.g., foreign tax

credit limitations under sections 904

and 906). However, with respect to the

characterization of substitute payments,

the IRS and Treasury believe that it is

appropriate, and more consistent with

existing guidance regarding the

treatment of substitute payments, to

apply the transparency rule only with

respect to foreign taxpayers and only for

limited purposes. Accordingly, the

transparency rule applies to determine

character only for certain purposes of

sections 864, 871, 881, 894, 4948(a) and

chapter 3 of the Code. For example,

under this rule, substitute payments to

a foreign person with respect to stocks

and securities that, absent the securities

lending transaction, would give rise to

foreign source effectively connected

income in the hands of such person,

will retain their character as dividend or

interest income for purposes of

determining whether the income is

effectively connected to the U.S. trade

or business of such person.

The transparency rule does not apply,

however, to characterize the U.S. source

income of U.S. trades or businesses of

foreign taxpayers. Accordingly, U.S.

source effectively connected income of

foreign taxpayers and U.S. source

income of U.S. taxpayers will be treated

the same. In this regard, the final

regulations do not affect existing

guidance applicable to both U.S. and

foreign taxpayers concerning the

characterization of substitute payments

for purposes of other sections not

specifically identified in these final

regulations. See, e.g., ev. Rul. 60–177

(1960–1 C.B. 9), (substitute payments

are ineligible for the dividends received

deduction under section 243); Rev. Rul.

80–135 (1980–1 C.B. 18), (substitute

payments are ineligible for the taxexemption on state and local bonds

under section 103).

Because the transparency rule does

not apply for purposes of sections 901

and 903, nothing in the final regulations

affects the determination required under

§ 1.901–2(f) concerning the identity of

the person by whom a foreign tax is

considered paid for purposes of sections

901 and 903.
53500 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

3. Substitute payments on portfolio debt

instruments

Under the final regulations, substitute

interest payments made with respect to

a debt instrument, the interest on which

qualifies as portfolio interest under

section 871(h) or section 881(c) in the

hands of the lender, is characterized as

portfolio interest if, in the case of an

obligation in registered form, the lender

provides the withholding agent with a

beneficial owner withholding certificate

or documentary evidence in accordance

with § 1.871–14(c) and no exception

from the portfolio interest exemption

applies. For example, if a bank lends

securities in a transaction that the facts

and circumstances indicate in substance

is an extension of credit pursuant to a

loan agreement in the ordinary course of

the bank’s trade or business, the

substitute payment may be

characterized as interest which would

not qualify as portfolio interest under

section 881(c)(3)(A).

4. Tax treaties

Some commentators noted that the

transparency rule adversely affects

foreign taxpayers that might otherwise

rely on a different characterization of

substitute payments in order to claim

benefits under certain income tax

treaties. The transparency rule would

eliminate these benefits in a number of

cases. Those commentators questioned

the government’s authority to issue

regulations that would characterize

substitute payments as dividend or

interest income in light of U.S. income

tax treaty provisions.

The IRS and Treasury believe that the

transparency rule in general is properly

issued pursuant to the general grant of

authority under section 7805 because it

eliminates opportunities for abuse that

arise from a rule that would characterize

substitute payments in a manner

different from the treatment of the

underlying payment. A transparency

approach provides uniform results for

economically similar investments.

Moreover, the IRS and Treasury

believe that, in the absence of a

transparency rule, many taxpayers

would use securities lending

transactions in order to avoid tax under

tax treaties or under the Code. For this

reason, authority to characterize

substitute payments for Code and treaty

purposes in the manner proposed in

1992 also is amply provided in section

7701(l), which was enacted after these

comments were received. Section

7701(l) provides a broad grant of

authority to issue regulations

recharacterizing multiple party

financing arrangements to prevent the

avoidance of any tax.

In this regard, the legislative history

provides that ‘‘the committee seeks to

bolster the Treasury’s ability to prevent

unwarranted avoidance of tax through

multiple-party financial engineering as

well as to provide a mechanism for

issuing additional guidance to taxpayers

entering into financial transactions.’’

See H.R. Rep. No. 103–111, 103rd Cong.,

1st Sess. 729 (1993). The committee also

made clear that this authority was not

limited to the types of back-to-back loan

transactions addressed in prior rulings.

See Rev. Rul. 84–152 (1984–2 C.B. 381);

Rev. Rul. 84–153 (1984–2 C.B. 383);

Rev. Rul. 87–89 (1987–2 C.B. 195).

Section 7701(l) in fact has been applied

to a broad range of financial

transactions. See, e.g., Prop. Regs.

§ 1.7701(l)–2 (treatment of obligationshifting transactions); and Notice 97–21

(IRB 1997–11, March 17, 1997), (tax

avoidance using self-amortizing

investments in conduit financing

entities).

The 1992 proposed regulation under

section 894 provided that where an

income tax convention refers to United

States law, the relevant law is the

section or sections of the Internal

Revenue Code and regulations

thereunder governing the tax which is

the subject of the provision. Some

commentators have suggested that the

proposed securities lending regulations

would be invalid for purposes of

characterizing dividends that are

specifically defined by treaties.

However, under conduit principles and

additional authority to characterize

payments pursuant to section 7701(l),

the regulations adopted under § 1.894–

1(c) address the identity of the owner of

dividend and interest income for treaty

purposes as opposed to the character of

the payments received under varying

treaty definitions. These regulations

therefore are consistent with the

government’s authority under treaties to

determine the identity of the beneficial

owner of income.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It is hereby

certified that these regulations will not

have a significant economic impact on

a substantial number of small entities.

Accordingly, a regulatory flexibility

analysis is not required. This

certification is based on the information

that follows. These regulations affect

entities engaged in cross-border

multiple-party financing arrangements.

These regulations affect the tax

treatment of substitute payments made

with respect to stocks and debt

securities. The primary participants

who engage in cross-border multiple

party financing arrangements of this

type are large regulated commercial

banks and brokerage firms. In addition,

comments received in response to the

notice of proposed rulemaking were

from law associations, other

associations that represent large

regulated financial companies or from

individuals. Accordingly, Treasury and

IRS do not believe that a substantial

number of small entities engages in

cross-border multiple party financing

arrangements of the type covered by

these regulations. Pursuant to section

7805(f) of the Code, the notice of

proposed rulemaking preceding these

regulations was submitted to the Small

Business Administration for comment

on its impact on small business.

Drafting Information: The principal

author of these regulations is Ramon

Camacho of the Office of the Associate

Chief Counsel (International).

However, other personnel from the

IRS and Treasury Department

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 is amended by adding entries

in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.861–2 also issued under 26 U.S.C.

863(a).

Section 1.861–3 also issued under 26 U.S.C.

863(a). * * *

Section 1.864–5 also issued under 26 U.S.C.

7701(l). * * *

Section 1.871–7 also issued under 26 U.S.C.

7701(l). * * *

Section 1.881–2 also issued under 26 U.S.C.

7701(l). * * *

Section 1.894–1 also issued under 26 U.S.C.

7701(l). * * *

Par. 2. Section 1.861–2 is amended by

adding a sentence at the end of

paragraph (a)(1); adding paragraph

(a)(7); and revising paragraph (e) to read

as follows:

§ 1.861–2 Interest.

(a) * * * (1) * * * See paragraph (a)(7)

of this section for special rules

concerning substitute interest paid or
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53501

accrued pursuant to a securities lending

transaction.

* * * * *

(7) A substitute interest payment is a

payment, made to the transferor of a

security in a securities lending

transaction or a sale-repurchase

transaction, of an amount equivalent to

an interest payment which the owner of

the transferred security is entitled to

receive during the term of the

transaction. A securities lending

transaction is a transfer of one or more

securities that is described in section

1058(a) or a substantially similar

transaction. A sale-repurchase

transaction is an agreement under

which a person transfers a security in

exchange for cash and simultaneously

agrees to receive substantially identical

securities from the transferee in the

future in exchange for cash. A substitute

interest payment shall be sourced in the

same manner as the interest accruing on

the transferred security for purposes of

this section and § 1.862–1. See also

§§ 1.864–5(b)(2)(iii), 1.871–7(b)(2),

1.881–2(b)(2) and for the character of

such payments and § 1.894–1(c) for the

application tax treaties to these

transactions.

* * * * *

(e) Effective dates. Except as

otherwise provided, this section applies

with respect to taxable years beginning

after December 31, 1966. For

corresponding rules applicable to

taxable years beginning before January

1, 1967, (see 26 CFR part 1 revised April

1, 1971). Paragraph (a)(7) of this section

is applicable to payments made after

November 13, 1997.

Par. 3. Section 1.861–3 is amended by

adding a sentence at the end of

paragraph (a)(1); adding paragraph

(a)(6); and removing the first sentence of

paragraph (d) and adding three

sentences in its place to read as follows:

§ 1.861–3 Dividends.

(a) * * * (1) * * * See also paragraph

(a)(6) of this section for special rules

concerning substitute dividend

payments received pursuant to a

securities lending transaction.

* * * * *

(6) Substitute dividend payments. A

substitute dividend payment is a

payment, made to the transferor of a

security in a securities lending

transaction or a sale-repurchase

transaction, of an amount equivalent to

a dividend distribution which the

owner of the transferred security is

entitled to receive during the term of the

transaction. A securities lending

transaction is a transfer of one or more

securities that is described in section

1058(a) or a substantially similar

transaction. A sale-repurchase

transaction is an agreement under

which a person transfers a security in

exchange for cash and simultaneously

agrees to receive substantially identical

securities from the transferee in the

future in exchange for cash. A substitute

dividend payment shall be sourced in

the same manner as the distributions

with respect to the transferred security

for purposes of this section and § 1.862–

1. See also §§ 1.864–5(b)(2)(iii), 1.871–

7(b)(2) and 1.881–2(b)(2) for the

character of such payments and § 1.894–

1(c) for the application of tax treaties to

these transactions.

* * * * *

(d) * * * Except as otherwise

provided in this paragraph this section

applies with respect to dividends

received or accrued after December 31,

1966. Paragraph (a)(5) of this section

applies to certain dividends from a DISC

or former DISC in taxable years ending

after December 31, 1971. Paragraph

(a)(6) of this section is applicable to

payments made after November 13,

1997. * * *

Par. 4. Section 1.864–5 is amended by

redesignating paragraph (b)(2)(ii) as

paragraph (b)(2)(iii) and adding new

paragraph (b)(2)(ii) to read as follows:

§ 1.864–5 Foreign source income

effectively connected with U.S. business.

* * * * *

(b) * * *

(2) * * *

(ii) Substitute payments. For purposes

of this paragraph (b)(2), a substitute

interest payment (as defined in § 1.861–

2(a)(7)) received by a foreign person

subject to tax under this paragraph (b)

pursuant to a securities lending

transaction or a sale-repurchase

transaction (as defined in § 1.861–

2(a)(7)) with respect to a security (as

defined in § 1.864–6(b)(2)(ii)(c)) shall

have the same character as interest

income paid or accrued with respect to

the terms of the transferred security.

Similarly, for purposes of this paragraph

(b)(2), a substitute dividend payment (as

defined in § 1.861–3(a)(6)) received by a

foreign person pursuant to a securities

lending transaction or a sale-repurchase

transaction (as defined in § 1.861–

3(a)(6)) with respect to a stock shall

have the same character as a

distribution received with respect to the

transferred security. This paragraph

(b)(2)(ii) is applicable to payments made

after November 13, 1997.

* * * * *

Par. 5. Section 1.871–7 is amended by

redesignating the text of paragraph (b) as

paragraph (b)(1); adding a paragraph

heading for newly designated paragraph

(b)(1); adding paragraph (b)(2); and

removing the first sentence of paragraph

(f) and adding two sentences in its place

to read as follows:

§ 1.871–7 Taxation of nonresident alien

individuals not engaged in U.S. business.

* * * * *

(b) Fixed or determinable annual or

periodical income—(1) General rule.

* * *

(2) Substitute payments. For purposes

of this section, a substitute interest

payment (as defined in § 1.861–2(a)(7))

received by a foreign person pursuant to

a securities lending transaction or a

sale-repurchase transaction (as defined

in § 1.861–2(a)(7)) shall have the same

character as interest income paid or

accrued with respect to the terms of the

transferred security. Similarly, for

purposes of this section, a substitute

dividend payment (as defined in

§ 1.861–3(a)(6)) received by a foreign

person pursuant to a securities lending

transaction or a sale-repurchase

transaction (as defined in § 1.861–

3(a)(6)) shall have the same character as

a distribution received with respect to

the transferred security. Where,

pursuant to a securities lending

transaction or a sale-repurchase

transaction, a foreign person transfers to

another person a security the interest on

which would qualify as portfolio

interest under section 871(h) in the

hands of the lender, substitute interest

payments made with respect to the

transferred security will be treated as

portfolio interest, provided that in the

case of interest on an obligation in

registered form (as defined in § 1.871–

14(c)(1)(i)), the transferor complies with

the documentation requirement

described in § 1.871–14(c)(1)(ii)(C) with

respect to the payment of the substitute

interest and none of the exceptions to

the portfolio interest exemption in

sections 871(h) (3) and (4) apply. See

also § 1.861–2(b)(2) and 1.894–1(c).

* * * * *

(f) * * * Except as otherwise

provided in this paragraph, this section

shall apply for taxable years beginning

after December 31, 1966. Paragraph

(b)(2) of this section is applicable to

payments made after November 13,

1997. * * *

Par. 6. Section 1.881–2 is amended by

redesignating the text of paragraph (b) as

paragraph (b)(1); adding a paragraph

heading for newly designated paragraph

(b)(1); adding a paragraph (b)(2); and

removing the first sentence of paragraph

(e) and adding two sentences in its place

to read as follows:
53502 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

§ 1.881–2 Taxation of foreign corporations

not engaged in U.S. business.

* * * * *

(b) Fixed or determinable annual or

periodical income—(1) General rule.

(2) Substitute payments. For purposes

of this section, a substitute interest

payment (as defined in § 1.861–2(a)(7))

received by a foreign person pursuant to

a securities lending transaction or a

sale-repurchase transaction (as defined

in § 1.861–2(a)(7)) shall have the same

character as interest income received

pursuant to the terms of the transferred

security. Similarly, for purposes of this

section, a substitute dividend payment

(as defined in § 1.861–3(a)(6)) received

by a foreign person pursuant to a

securities lending transaction or a salerepurchase transaction (as defined in

§ 1.861–2(a)(7)) shall have the same

character as a distribution received with

respect to the transferred security.

Where, pursuant to a securities lending

transaction or a sale-repurchase

transaction, a foreign person transfers to

another person a security the interest on

which would qualify as portfolio

interest under section 881(c) in the

hands of the lender, substitute interest

payments made with respect to the

transferred security will be treated as

portfolio interest, provided that in the

case of interest on an obligation in

registered form (as defined in § 1.871–

14(c)(1)(i)), the transferor complies with

the documentation requirement

described in § 1.871–14(c)(1)(ii)(C) with

respect to the payment of substitute

interest and none of the exceptions to

the portfolio interest exemption in

sections 881(c) (3) and (4) apply. See

also §§ 1.871–7(b)(2) and 1.894–1(c).

* * * * *

(e) * * * Except as otherwise provide

in this paragraph, this section applies

for taxable years beginning after

December 31, 1966. Paragraph (b)(2) of

this section is applicable to payments

made after November 13, 1997. * * *

Par. 7. Section 1.894–1 is amended by

revising paragraph (c) and adding

paragraph (d) to read as follows:

§ 1.894–1 Income affected by treaty.

* * * * *

(c) Substitute interest and dividend

payments. The provisions of an income

tax convention dealing with interest or

dividends paid to or derived by a

foreign person include substitute

interest or dividend payments that have

the same character as interest or

dividends under § 1.864–5(b)(2)(ii),

1.871–7(b)(2) or 1.881–2(b)(2). The

provisions of this paragraph (c) shall

apply for purposes of securities lending

transactions or sale-repurchase

transactions as defined in § 1.861–

2(a)(7) and § 1.861–3(a)(6).

(d) Effective dates. Paragraphs (a) and

(b) of this section apply for taxable years

beginning after December 31, 966. For

corresponding rules applicable to

taxable years beginning before January

1, 1967, (see 26 CFR part 1 revised April

1, 1971). Paragraph (c) of this section is

applicable to payments made after

November 13, 1997.

§ 1.7701(l)–1 [Amended]

Par. 10. Section 1.7701(l)–1 is

amended as follows:

1. Paragraph (a) is amended by

removing the paragraph designation (a)

and the heading.

2. Paragraph (b) is removed.

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: August 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–25999 Filed 10–6–97; 8:45 am]

BILLING CODE 4830–01–P