9846 Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Rules and Regulations 

Need for Correction 

As published on December 19, 2011 

(76 FR 78553), final regulation (TD 

9567) contains errors which may prove 

to be misleading and are in need of 

correction. 

Correction of Publication 

Accordingly, the publication of the 

final regulations (TD 9567), which were 

the subject of FR Doc. 2011–32263, is 

corrected as follows: 

1. On page 78557, the first column, in 

the preamble, in paragraph (J), line 7 

from the bottom of the paragraph, the 

language ‘‘Investment Company or a 

Qualified’’ is corrected to read 

‘‘Investment Company or Qualified’’. 

2. On page 78557, the third column, 

in the preamble, lines one and two in 

the first paragraph of paragraph (C) the 

language ‘‘Except as described in 

sections 5(D) and 5(E) of this 

explanation, for’’ is corrected to read 

‘‘Except as described in sections 4(D) 

and 4(E) of this explanation, for’’. 

Guy R. Traynor, 

Federal Register Liaison, Legal Processing 

Division, Publications & Regulations Br., 

Procedure & Administration. 

[FR Doc. 2012–3936 Filed 2–17–12; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9579] 

RIN 1545–BJ78 

Source of Income From Qualified Fails 

Charges 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

temporary regulations. 

SUMMARY: This document contains final 

regulations that prescribe the source of 

income received on a qualified fails 

charge under section 863 of the Internal 

Revenue Code (Code). The regulations 

finalize proposed regulations and 

withdraw temporary regulations 

published on December 8, 2010, and 

affect persons that pay or are entitled to 

receive qualified fails charges, including 

withholding agents. 

DATES: Effective Date. These regulations 

are effective on February 21, 2012. 

Applicability Date. For the date of 

applicability, see § 1.863–10(g). 

FOR FURTHER INFORMATION CONTACT: 

Karen Walny, 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 (Treasuries), the Treasury 

Market Practices Group (TMPG) and the 

Securities Industry and Financial 

Markets Association published a trading 

practice governing failed deliveries of 

Treasuries in 2008. In July, 2009, the 

Treasury Department and the Internal 

Revenue Service (IRS) issued Notice 

2009–61 (2009–2 CB 181), which 

provided that the IRS will not challenge 

the position taken by a taxpayer or a 

withholding agent that a fails charge 

paid with respect to a Treasury on or 

before December 31, 2010 is not subject 

to U.S. gross basis taxation. On 

December 8, 2010, the Treasury 

Department and the IRS issued 

temporary and proposed regulations 

that establish source rules for a fails 

charge paid with respect to a Treasury, 

with a correction to the temporary 

regulations on December 28, 2010. 75 

FR 76262, 75 FR 76321, and 75 FR 

81457, respectively. 

The temporary and proposed 

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 the 

income from which 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. 

No comments were received on the 

proposed regulations, and no hearing 

was requested or held. This Treasury 

decision adopts the proposed 

regulations with the changes discussed 

in this preamble. 

Explanation of Provisions 

These final regulations adopt, with 

one substantive change, the proposed 

regulations on the source of a qualified 

fails charge. The final regulations also 

make a number of clarifying changes to 

the language of the regulations. 

The preamble to the temporary 

regulations noted that no trading 

practice existed at that time for fails 

charges on securities other than 

Treasuries, but that if a fails charge 

trading practice pertaining to other 

securities was endorsed by the TMPG or 

an agency of the United States 

government, the Treasury Department 

and the IRS would consider whether the 

source rule in the regulations should be 

extended to those fails charges. The 

TMPG has subsequently endorsed a 

trading practice for debentures issued 

by the Federal National Mortgage 

Association (Fannie Mae), the Federal 

Home Loan Mortgage Corporation 

(Freddie Mac), and the Federal Home 

Loan Banks and agency pass-through 

mortgage-backed securities issued or 

guaranteed by the Government National 

Mortgage Association (Ginnie Mae), 

Fannie Mae, and Freddie Mac (Agency 

Debt and Agency MBS, respectively) 

beginning in February, 2012. 

The Treasury Department and the IRS 

have determined that the same source 

rule should apply to fails charges 

incurred with respect to Agency Debt 

and Agency MBS as to fails charges on 

Treasuries. Accordingly, these final 

regulations expand the scope of a 

qualified fails charge to fails charges 

paid with respect to Agency Debt. The 

sourcing rule in the final regulations 

also applies to a fails charge on Agency 

MBS guaranteed by Fannie Mae, 

Freddie Mac, and Ginnie Mae (for tax 

purposes, Fannie Mae, Freddie Mac, 

and Ginnie Mae do not issue Agency 

MBS). The final regulations do not 

address the source of any other 

payment, including a fails charge that is 

not a qualified fails charge. 

The Treasury Department and the IRS 

are considering whether separate 

guidance is needed on the source of 

income attributable to certain payments, 

other than qualified fails charges, that 

arise in securities lending transactions 

or repurchase transactions and request 

comments regarding this issue. 

Effective Date 

These regulations are effective on 

February 21, 2012. 

Applicability Date 

These regulations apply to a qualified 

fails charge 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, as 

supplemented by Executive Order 

13563. 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 

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Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Rules and Regulations 9847 

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 Code, 

the proposed regulations preceding 

these regulations were submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal author of these 

regulations is Karen Walny, Office of the 

Associate Chief Counsel (International). 

However, other persons from the Office 

of Associate Chief Counsel 

(International) and the 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 continues to read in part as 

follows: 

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

* * * 

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

read as follows: 

§ 1.863–10 Source of income from a 

qualified fails charge. 

(a) In general. Except as provided in 

paragraphs (b) and (c) of this section, 

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 (as defined in section 989) 

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. Qualified fails charge income 

that arises from a transaction any 

income from which is (or would be if 

the transaction produced income) 

effectively connected with a United 

States trade or business pursuant to 

§ 1.864–4(c) is treated as from sources 

within the United States, and the 

income from the qualified fails charge is 

treated as effectively connected to the 

conduct of a United States trade or 

business. 

(d) Qualified fails charge. For 

purposes of this section, a qualified fails 

charge is a payment that— 

(1) Compensates a party to a 

transaction that provides for delivery of 

a designated security (as defined in 

paragraph (e) of this section) in 

exchange for the payment of cash 

(delivery-versus-payment settlement) for 

another party’s failure to deliver the 

specified designated security on the 

settlement date specified in the relevant 

agreement; and 

(2) Is made pursuant to— 

(i) 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 

(ii) Any trading practice, program, 

policy or procedure approved by the 

Commissioner in guidance published in 

the Internal Revenue Bulletin. 

(e) Designated security. For purposes 

of this section, a designated security 

means any— 

(i) Debt instrument (as defined in 

§ 1.1275–1(d)) issued by the United 

States Treasury Department, the Federal 

National Mortgage Association, the 

Federal Home Loan Mortgage 

Corporation, or any Federal Home Loan 

Bank; or 

(ii) Pass-through mortgage-backed 

security guaranteed by the Federal 

National Mortgage Association, the 

Federal Home Loan Mortgage 

Corporation, or the Government 

National Mortgage Association. 

(g) Effective/applicability date. This 

section is effective on February 21, 

2012. This section applies to a qualified 

fails charge paid or accrued on or after 

December 8, 2010. 

§ 1.863–10T [Removed] 

■ Par. 3. Section 1.863–10T is removed. 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: February 14, 2012. 

Emily S. McMahon, 

Acting Assistant Secretary of the Treasury, 

Tax Policy. 

[FR Doc. 2012–3909 Filed 2–17–12; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Office of the Secretary 

31 CFR Part 1 

RIN 1505–AC33 

Privacy Act of 1974; Implementation 

Correction 

In rule document 2011–29385 

appearing on pages 70640–70644 the 

issue of Tuesday, November 15, 2011 

make the following correction: 

§ 1.36 [Corrected] 

■ On page 70644, in § 1.36, in paragraph 

(g)(1)(viii), in the untitled table, the 

third row of the table should read: 

‘‘IRS 90.002 . . . . . Chief Counsel 

Litigation and Advice (Civil) Records’’ 

[FR Doc. C1–2011–29385 Filed 2–17–12; 8:45 am] 

BILLING CODE 1505–01–D 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 165 

[Docket No. USCG–2012–0067] 

RIN 1625–AA00 

Safety Zone; Kinnickinnic River 

Containment and Cleanup; Milwaukee, 

WI 

AGENCY: Coast Guard, DHS. 

ACTION: Temporary final rule. 

SUMMARY: The Coast Guard is 

establishing a temporary safety zone on 

the Kinnickinnic River in Milwaukee, 

Wisconsin. This zone is intended to 

restrict vessels from a portion of the 

Kinnickinnic River due to the petroleum 

cleanup efforts. This temporary safety 

zone is necessary to protect the 

surrounding public and vessels from the 

hazards associated with the removal of 

petroleum product from this area of the 

Kinnickinnic River. 

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