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Industry Directive on Total Return Swaps (“TRSs”) Used to Avoid Dividend Withholding Tax

LMSB Control No:  LMSB- 4-1209-044
Impacted IRM: 4.51.5

January 14, 2010

MEMORANDUM FOR

INDUSTRY DIRECTORS
DIRECTOR, FIELD SPECIALISTS
DIRECTOR, PREFILING AND TECHNICAL GUIDANCE
DIRECTOR, INTERNATIONAL COMPLIANCE STRATEGY AND POLICY

FROM:

Lori L. Nichols   /s/ Lori Nichols
Director, International Compliance, Strategy and Policy
Deputy Commissioner, International

SUBJECT:

Industry Directive on Total Return Swaps (“TRSs”) Used to Avoid Dividend Withholding Tax

 

This industry director directive (“IDD”) is intended to provide the field with guidance and information document requests (“IDR”) for uncovering and developing cases related to TRS transactions that may have been executed in order to avoid tax with respect to U.S. source dividend income paid to non-resident alien individuals, foreign partnerships, and foreign corporations (each, a “Foreign Person”).  Such dividend withholding tax avoidance transactions have recently been identified as part of a new Tier I issue, U.S. Withholding Agents - Reporting and Withholding on U.S. Source FDAP Income.  Some taxpayers and withholding agents contend that the payments made pursuant to certain transactions are foreign source pursuant to Treas. Reg. § 1.863-7 and therefore are not subject to U.S. withholding tax and Form 1042-S reporting.  The intent of this IDD is to provide guidance on developing facts for determining when a transaction that is in form a TRS will be respected in substance as a notional principal contract, and when such a swap will be recharacterized in accordance with its substance as an agency agreement, repurchase agreement, lending transaction, or some other form of economic benefit by the Foreign Person. 

The purpose of this IDD is to provide guidance for teams examining the withholding tax obligations of U.S. financial institutions (including U.S. branches of foreign banks) that engaged in TRS transactions with Foreign Persons.  Agents examining the income tax liabilities of such Foreign Persons under I.R.C. section 871 and 881, as well as the withholding liabilities, may use this IDD as a resource in the development of those cases.  However, further coordination and guidance with the Technical Advisor and Industry Counsel for Hedge Funds and Private Equity funds is recommended.

Examination Guidance

This IDD describes four factual situations, each of which presents a variation of a typical TRS transaction.  After describing the basic facts of each situation, this IDD instructs the field how to proceed with an examination of each situation.  In situations in which this IDD recommends that the field pursues an examination, the field should develop facts showing that the form of the TRS should be disregarded for U.S. federal income tax purposes.  In these situations, the field is directed to develop facts supporting a legal conclusion that the Foreign Person retained ownership of the reference securities for U.S. federal income tax purposes even though the Foreign Person may have transferred the legal title to such securities. 

The four factual situations described in this IDD are representative examples of common variations of TRS transactions. The field should note that particular transactions under examination may not fit exactly within any one of the four situations discussed below.  In such examinations, the field is instructed to use one or more of four situations and recommendations described in this IDD to tailor its examination of the facts and circumstances of a specific transaction.  Thus, one Total Return Swap Informal Document Request (TRS IDR) template is provided for each of the situations.  

Situation #1 (Cross-in/Cross-Out):

A Foreign Person owns an equity security issued by a publicly-traded U.S. corporation (a “U.S. Equity Security”).[1]   The U.S. corporation pays regular and/or extraordinary dividends with respect to the U.S. Equity Securities.  The field needs to determine whether these payments by the U.S. financial institution to the Foreign Person give rise to a tax liability of the Foreign Person under Sections 871 or 881 and whether the U.S. financial institution or the Foreign Person has a withholding obligation under Sections 1441, 1442 and 1461.  The Foreign Person sells its U.S. Equity Security to a U.S. financial institution acting as a broker-dealer. 

Simultaneously, the Foreign Person enters into a TRS with the same U.S. financial institution as the swap counterparty.  The TRS references the same U.S. Equity Securities sold to the U.S. financial institution by the Foreign Person and the notional amount of the TRS equals the fair market value of the U.S. Equity Securities sold to the U.S. financial institution.  Pursuant to the terms of the TRS, the Foreign Person is required to make payments to the U.S. financial institution based on an interest component (such as a LIBOR-based payment) and any depreciation with respect to the notional investment in the U.S. Equity Securities (an “Equity Equivalent Position”).  The U.S. financial institution is required to make payments to the Foreign Person in an amount equal to any appreciation with respect to the notional investment in the U.S. Equity Securities and any dividend paid with respect to the U.S. Equity Securities (a “Synthetic Issuer Position”).  Payment obligations with respect to the Equity Equivalent and Synthetic Issuer Positions may be netted against each other.
 
The simultaneous sale of U.S. Equity Securities and acquisition of an Equity Equivalent Position pursuant to a TRS is referred to below as a “cross-in.”  The Foreign Person holds the Equity Equivalent Position in the swap over the record date or dates.[2]   After the record date or dates, the Foreign Person terminates the swap and at the same time repurchases the U.S. Equity Securities from the U.S. financial institution (also described below as a “cross-out”).  The fair market value of the U.S. Equity Securities on the cross-in, and the repurchase price on the cross-out, are likely to be determined in such a manner that insures the Foreign Person has no pricing risk on the cross-in and the cross-out, but retains the overall ownership risk in the U.S. Equity Securities.  To determine the notional principal amount of the TRS and the appreciation or depreciation with respect to the U.S. Equity Security referenced by the TRS, the documents may reference the same pricing mechanism (e.g., market on close (“MOC”)) or may require the use of a single interdealer broker, or the circumstances may show that the parties are likely to be in the market together upon a cross, particularly where the volume is typically low and the number of market participants is limited based upon a pattern of dealing or other relevant facts.

The meaning of an MOC buy order or MOC sell order should be determined by reference to the rules of the relevant exchange on which the securities are traded.  For example, see the New York Stock Exchange Rule 123C Relating to Market-on-Close Policy and Expiration Procedures.  The MOC orders eliminate risk because the buyer and seller know that their respective sales price and purchase price will be exactly the same.  Usually, MOC orders are guaranteed to be executed if placed before a certain time for at least one exchange and virtually certain of occurring for other exchanges.  Because MOC orders eliminate pricing risk, the use of MOC to calculate the termination payment under the TRS and to determine the purchase price of the U.S. Equity Security reacquired by the Foreign Person is equivalent to a “cross-out.”  In addition to MOC, U.S. financial institutions and Foreign Persons may have used other strategies that eliminate price risk by using the same price calculation method to determination the final settlement of the swap and to determine the purchase price of the stock sold in the cross-out.  These price calculation methods may be based on objective benchmarks such as VWAP (Volume Weighted Average Price) or MOO (Market on Open), which uses the first price of the trade day.     

Past examinations suggest that for the periods currently under exam, relatively few TRS transactions involving potential U.S. dividend withholding tax avoidance will have been structured precisely as described above.  Nonetheless, audit teams should continue to pursue examinations of these types of transactions.  To facilitate such investigations, the field is directed to issue Total Return Swap Fact Pattern One Information Document Request (“TRS IDR #1”) to help identify these abusive transactions in an efficient manner. 

TRS IDR #1 will help audit teams identify those transactions where the Foreign Person maintained control over the equity securities that creates an agency relationship between the Foreign Person and the U.S. financial institution, where the Foreign Person maintained elements of beneficial ownership resembling a sale and repurchase agreement[3]  or other similar arrangement, or where the transaction may be treated in substance as a securities lending transaction, loan, or other similar arrangement.  TRS IDR #1 attempts to collect all relevant facts, whether obvious or not, such as:  (1) whether any agreement or some other understanding or arrangement, written or not, (an “Arrangement”) under which the U.S. financial institution would return the stock to the Foreign Person at the termination of the swap; and (2) whether the Foreign Person and the U.S. financial institution used a pricing mechanism that eliminated the pricing risk with respect to the U.S. Equity Security.  The Field may also wish to consider the following factors indicating that the Foreign Person remained  the beneficial owner of the U.S. Equity Securities during the term of the TRS:  (1) whether the Foreign Person maintained voting rights in some fashion; (2) whether the U.S. financial institution cast any votes with respect to the U.S. Equity Securities held as a hedge of its position under the TRS and whether such votes were independent of the Foreign Person’s instructions or control; (3) whether contractual provisions or other formal or informal arrangements, expressly written or not, existed that required the U.S. financial institution counterparty to hedge its position under the swap in a particular manner (i.e., by holding the physical underlying reference security); and (4) whether contractual provisions or other formal or informal arrangements existed, expressly written or not, that required the Foreign Person to bear the U.S. financial institution’s cost of hedging its Synthetic Issuer Position. 

The Field will determine the existence of an Arrangement on a case by case basis, with the assistance of Counsel, depending on the facts and circumstances.  No one single fact or fact pattern is considered a controlling fact or fact pattern, and different facts will exist in different cases.  The field is directed to gather all of the available facts and then develop a conclusion with Counsel.                                            
 
Notwithstanding these factors and the specific information requested pursuant to the TRS IDR #1, the field is directed to consider any other facts that indicate that (1) the Foreign Person has not divested its beneficial ownership interest in the U.S. Equity Securities, (2) the form of a TRS does not match the substance of the transaction, or (3) the U.S. financial institution acted as an agent for the Foreign Person by holding the U.S. Equity Securities. 

In addition, the field is directed to use TRS IDR #1, any other IDR described herein, and interviews to examine transactions that resemble the facts outlined in Situation #1 even when the transaction under examination does not include every fact mentioned above. 

Situation #2 (Cross-in/IDB Out):

The facts of Situation #2 are the same as Situation #1 except that when the Foreign Person terminates the swap and crosses-out, the Foreign Person reacquires the U.S. Equity Securities from a third-party who is not an affiliate of the U.S. financial institution (an “Unaffiliated Third-Party”) rather than from the U.S. financial institution that was a counterparty to the swap.

In examining a transaction that resembles Situation #2, the field is directed to develop facts showing the existence of an Arrangement involving the Foreign Person and either the U.S. financial institution, the Unaffiliated Third-Party, or both, with respect to the Foreign Person’s repurchase of the U.S. Equity Securities.  When the examination identifies a transaction where the parties entered into such an Arrangement, the field is directed to complete the examination in the same manner as described in Situation #1.  If the field, after examination, does not find such an Arrangement, the examination should be concluded. 

In one variation of these transactions the U.S. financial institution or the Foreign Person engages an inter-dealer broker (an “IDB”) to act as an intermediary to facilitate the cross-out to the Foreign Person.  At the conclusion of the transaction, the U.S. financial institution will sell the U.S. Equity Securities to an IDB and the IDB will sell the U.S. Equity Securities to the Foreign Person.  The IDB usually receives some type of small fee or spread for its participation, but the economic impact of an IDB is the same as cross trades that eliminate the pricing risk (the amount due under the TRS will be exactly equal to the amounts due from sale of the U.S. Equity Securities) for both the Foreign Person and the U.S. financial institution.  The use of an IDB may provide prima facia evidence of an Arrangement because IDBs are in the business of standing between two parties to a transaction.  Further, the use of an IDB may show a pattern of dealing or course of conduct indicating that a U.S. financial institution has used a third party to facilitate the cross-outs with respect to other TRSs.

In developing the facts in the examination, the audit teams should issue Total Return Swap Fact Pattern Two IDR  (TRS IDR #2), which seeks to target information indicating that an Arrangement existed whereby the U.S. financial institution coordinates the Foreign Person’s reacquisition of the U.S. Equity Securities through the Unaffiliated Third-Party.  TRS IDR #2 attempts to collect all relevant facts, whether obvious or not, such as: (1) whether the U.S. financial institution received an unusually small commission in connection with any trades, (2) whether the U.S. financial institution paid or received any fees to the Unaffiliated Third-Party, and (3) whether the Foreign Person and the U.S. financial institution entered into any formal or informal agreements, understandings, side letters, contracts, or otherwise formulated an arrangement, written or not, with respect to the Foreign Person reacquiring the U.S. Equity Security upon the termination of a TRS.  If such an Arrangement is demonstrated through responses to TRS IDR #2 or interviews, the audit team is directed to proceed with the examination as directed under Situation #1.

Notwithstanding these factors and the specific information requested pursuant to the TRS IDR #2, the field is directed to consider any other facts that indicate that (1) the Foreign Person has not divested its beneficial ownership interest in the U.S. Equity Securities, (2) the form of a TRS does not match the substance of the transaction, (3) the U.S. financial institution acted as an agent for the Foreign Person by holding the U.S. Equity Securities, or (4) the Foreign Person, the U.S. financial institution and/or the Unaffiliated Third Party had an Arrangement with respect to the reacquisition of the U.S. Equity Securities by the Foreign Person. 

In addition, the field is directed to use TRS IDR #2, any other IDR described herein, and interviews to examine transactions that resemble the facts outlined in Situation #2 even when the transaction under examination does not include every fact mentioned above.

Situation #3 (Cross-In/Foreign Affiliate Out):

The facts of Situation #3 are the same as Situation #1 except that the Foreign Person enters into a TRS with a foreign affiliate of the U.S. financial institution (“Foreign Affiliate”) as the swap counterparty.  To eliminate or substantially reduce its risk with respect to its position under the TRS, the Foreign Affiliate enters into a mirror swap with the U.S. financial institution.  Finally, when the Foreign Person terminates the swap, the Foreign Person repurchases the U.S. Equity Securities from the Foreign Affiliate or the U.S. financial institution.

With respect to the facts discussed in Situation #3, the field is directed to follow Total Return Swap Fact Pattern Three IDR (TRS IDR #3) to develop facts related to these transactions in a manner that is consistent with the guidance provided in Situation #1.  Specifically, the field is instructed to develop facts with respect to both the TRS entered in by (1) U.S. financial institution and the Foreign Affiliate and (2) the Foreign Affiliate and the Foreign Person.  Notwithstanding these factors and the specific information requested pursuant to the TRS IDR #3, the field is directed to consider any other facts that indicate that (1) the Foreign Person has not divested its beneficial ownership interest in the U.S. Equity Securities, (2) the form of a TRS does not match the substance of the transaction, or (3) U.S. financial institution acted as an agent for the Foreign Person by holding the U.S. Equity Securities. 

Treasury Regulation section 1.1441-7(a)(1) defines a withholding agent as “any person, U.S. or foreign, that has control, receipt, custody, disposal, or payment of an item of income of a foreign person subject to withholding . . .”.  Both the U.S. financial institution and the Foreign Affiliate may satisfy the definition of a withholding agent with respect to the dividend payments.  In addition to examining the U.S. financial institution, the field may wish to consult the Withholding on Foreign Payments Technical Advisor for guidance with respect to the examination of the Foreign Affiliate and the Foreign Person. 
 
In addition, the field is directed to use TRS IDR #3, any other IDR described herein, and interviews to examine transactions that resemble the facts outlined in Situation #3 even when the transaction under examination does not include every fact mentioned above.  For example, in other variations of this Situation #3, the Foreign Person repurchases the U.S. Equity Securities from the U.S. financial institution, another party related to the U.S. financial institution or a third-party seller of securities who act as an accommodation party on behalf of U.S. financial institution.  In the event that the field discovers such transaction, the field is directed to use TRS IDR #2.   
 
Situation #4 (Fully Synthetic):

The facts of Situation #4 are the same as Situation #1 except that the Foreign Person has never owned the U.S. Equity Security referenced by the TRS.  To eliminate or substantially reduce its risk with respect to its position under the TRS, U.S. financial institution hedges its Synthetic Issuer Position under the swap.  When the Foreign Person terminates the swap, it does not purchase the reference securities from the U.S. financial institution or any other broker-dealer.

Absent additional exceptional facts as discussed below, the field should not pursue such transactions.  Treasury regulations provide different tax consequences for different investment arrangements by providing different source rules for dividends paid with respect to physical long positions in an U.S. Equity Security and for dividend equivalents paid pursuant to an equity equivalent position held synthetically through notional principal contracts that reference the same U.S. Equity Security.  The existing notional principal contract rule, found in Treas. Reg. Sec. 1.863-7, is clear on its face; taxpayers and withholding agents may rely on that rule when their investment is in substance and form a notional principal contract.

The field, however, should pursue transactions resembling Situation #4 when certain facts indicate that the Foreign Person exercised control with respect to the U.S. financial institution’s hedge and, therefore, may have obtained beneficial ownership of the U.S. Equity Securities as a result of entering into a TRS.  In particular, when a Foreign Person holds a TRS position that is so large or so illiquid that a U.S. financial institution acting as the swap counterparty must acquire the underlying security itself to hedge its Synthetic Issuer Position under the swap, the Foreign Person may be considered the beneficial owner of the reference U.S. Equity Securities.   Other factual situations may indicate that the Foreign Person exercised control over the physical securities held by the U.S. financial institution as a hedge,  including: (1) transactions in which the U.S. financial institution hedged its Synthetic Issuer Position by retaining the physical underlying reference securities on its books, (2) transactions in which the Foreign Person maintained voting rights with respect to the physical underlying reference securities, and (3) transactions in which the U.S. financial institution cast any votes with respect to the physical underlying reference securities in a manner directed formally or informally by the swap counterparty.  The field is directed to use Total Return Swap Fact Pattern Four IDR (TRS IDR #4) and interviews to help identify these abusive cases in an efficient manner.  Finally, the field should consider all the facts and circumstances to determine whether a particular transaction that is in form a notional principal contract constitutes a legitimate swap agreement in substance. 

TRSs Referencing Equity Securities Issued by Privately-Held U.S. Corporations

The field is instructed to examine any transaction where the Foreign Person entered into a TRS that references an equity security issued by a privately-held U.S. corporation[4]  (a “TRS Referencing Private Securities”).  The field should pursue any TRS Referencing Private Securities where the structure of the transaction resembles any of the transactions described above in Situations #1 through #4.  In addition, the field should pursue any other TRS Referencing Private Securities structured in a manner that is not specifically described in this IDD.  In a TRS Referencing Private Securities, the Foreign Person likely maintains control with respect to the reference private securities such that the Foreign Person may be considered the beneficial owner of reference securities.  In the examination of a TRS Referencing Private Securities, the field is directed to develop facts necessary to support a challenge to such transaction similar to the challenge described above in situation #4. 

TRS Executed Using an Automated Program Trading Offered by the U.S. Financial Institution

The field is instructed to examine any transaction where the Foreign Person entered into a TRS using an automated program trading offered by the U.S. financial institution.  The automated program trading would allow the Foreign Person to simultaneously and automatically trigger the U.S. financial institution’s execution, acquisition, and disposition of the TRS and the U.S. Equity Securities.  The use of such automated program trading allows the Foreign Person to effectively control when and how the U.S. Equity Securities’ acquisition and disposition are executed, with the U.S. financial institution assuming no risk with respect to the pricing.  In such a case, the Foreign Person may be considered the beneficial owner of reference securities.  The field should examine these transactions in light of the four situations discussed in this directive.

TRSs Referencing a Portfolio of U.S. Equity Securities 

In the event that the field examines a transaction in which the TRS references a basket or portfolio of U.S. Equity Securities, the field should seek the assistance of the Industry Counsel and Technical Advisor.

Audit Techniques

The field always has the responsibility to monitor the statute of limitations on assessment under Section 6501, whether for a Form 1042 or any other income tax return.  In the examination of TRSs used to avoid withholding tax with respect to dividends, the field is directed to issue the four IDR templates specific to TRSs asking the taxpayer and/or the withholding agent to identify and provide information with respect to all transactions that satisfy the criteria set forth in those IDRs.  See attachments for the pro forma IDRs with a list of information to request.  In addition, the field is reminded to issue “Model IDR for Withholding Strategy 1 and 2” with respect to any new examination of TRS transactions.  See attached.  However, the field should not be constrained by the five day period mentioned in Model IDR for Withholding Strategy 1.  In the examination of TRSs, the field must make a referral to a financial products specialist, a Computer Analyst Specialist, and an International Examiner.  Finally, the field should consider whether relevant information may be obtained through other applicable methods including, but not limited to, the use of third-party summonses, such as the Foreign Person’s prime brokerage account, and interviews of all appropriate parties, including members of the U.S. financial institution’s information technology departments to identify the computer programs used to execute TRSs and acquire and dispose of the U.S. Equity Securities.  The field should coordinate these examinations with the teams that may be examining the Foreign Persons who executed the TRSs with U.S. financial institutions.

The field should analyze all possible transactions, particularly those that use MOC pricing and those transactions referencing a security that paid an extraordinary dividend.  Additionally, there are known IDBs that facilitate these transactions. TA Bob Driscoll and IC Victoria Kanrek should be consulted for these known IDBs.  The examples listed herein are not intended to be exhaustive; the field should pursue other appropriate audit techniques as determined on a case by case basis. 
 
Resolution

Each transaction may be factually unique.  The agent must contact the Withholding on Foreign Payments Technical Advisor, the Financial Services Technical Advisor, and the Industry Counsel for not only additional guidance before consideration of any resolution other than full concession by the taxpayer and/or the withholding agent, but also to keep track of the cases the field is developing.

Contact Name and Phone Number:

Bob Driscoll, Withholding on Foreign Payments Technical Advisor, Tel.: (713) 209-4456
John Goretti, Financial Products Technical Advisor, Tel.: (781) 835-4321
Victoria Kanrek, Industry Counsel for the Withholding Issue Management Team, Tel.: (917) 421-4665
Oleida Sullivan, Industry Counsel for Hedge Funds, Tel.: (516) 688-1739
Sheryl Davis, Securities and Financial Services Technical Advisor, Tel.: (972) 308-7662.

This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such. 

Attachments:

Model IDR for Withholding Strategy 1
Model IDR for Withholding Strategy 2
TRS IDR #1
TRS IDR #2
TRS IDR #3
TRS IDR #4

cc:

Footnotes:

  1. In the event that the field examines a transaction in which the equity security is an equity interest in a publicly traded partnership as defined in section 7704(c) of the Internal Revenue Code, the field should seek the assistance of counsel.
  2. The record date is the “date on which a firm’s books are closed during the process of identifying the owners of a certain class of securities for purposes of transmitting dividends . . . .  For example, only the common stockholders who are listed on the record date will receive the dividends that are to be mailed on the payment date.”  Wall Street Words, David L. Scott, (3d. Ed. 2003).
  3. A repurchase agreement is a simultaneous agreement (whether written or otherwise) (1) to “sell” an asset and (2) to repurchase the same (or substantially similar) asset at the end of a specified period for a set price.
  4. In the event that the field examines a transaction in which the equity security is an equity interest in a privately-held partnership, the field should seek the assistance of counsel.

ATTACHMENT 1

Model IDR for Withholding Strategy 1

Information Document Request
Form 1042 Examination

The numbered requests are made in connection with the below described strategy, plan or arrangement or any similar strategy, plan or arrangement.     

Description of Strategy

Any strategy, plan or arrangement that the taxpayer devised, planned, sold, arranged, advised about or participated in relating to the use of equity swaps, total return swaps, short sales, security lending transactions, or other financial instruments or devices (“financial instruments”), but limited as follows (“the Strategy”).  The Strategy includes each case in which, during the tax year(s) covered by this examination, 1) the taxpayer acquired shares of stock, with settlement on any date beginning 5 business days before a dividend declaration date for the stock and ending on the stock’s dividend record date, and 2) within the same period, the taxpayer engaged in, with a foreign person as counterparty, a transaction involving a financial instrument calling for or requiring payments from either party determined by reference in any respect to such stock, in whole or part.  The above-referenced stocks are limited to those that were to pay U.S. sourced dividends within the meaning of I.R.C. Sec. 861(a)(2).  The term “person” or “counterparty” refers to an individual, corporation and any other entity considered a beneficial owner of income under Treas. Reg. §1.1441-1(c)(6)(i), or any other persons who may have acted as agent or intermediary for such owner in connection with this Strategy. 

The Strategy further includes all transactions referred to as either “Yield Enhancement”, “Dividend Arbitrage”, or “Tax Efficiency” transactions. 

The term “documents” includes those in hardcopy form as well as computer stored and generated documents, computer databases, computer disks and formats, machine readable electronic files or records maintained on a computer, telexes, telegrams, electronic mail (commonly referred to as “e-mail”), and similar or related documents and materials.  Such documents include all those in the Taxpayer’s custody.  They further include documents in the possession of attorneys, accountants, affiliates advisors representatives or other persons directly or indirectly employed by you, hired by you, or connected with you or your representative, and anyone else otherwise subject to your control.

If a privilege is claimed for withholding any requested item, state with specificity the nature of the privilege and the extent of all allegedly privileged matters.  If you object to producing only part of a document, provide us with a redacted copy.  With respect to each allegedly privileged document or redacted document, provide the following:

  1. The date appearing on such document or, if it has no date, the date or approximate date that such document was created;
  2. The identity or descriptive code number, file number, title, or label of such document used by the custodian of the document to identify it for retrieval;
  3. The general nature and description of such document and the identity of the person who signed such document and, if it was not signed, the response shall so state and give the identity of the person(s) who prepared it;
  4. The identity of the person to whom such document was addressed and the identity of each person other than such addressee to whom such document, or a copy thereof were given or sent at any time;
  5. The identity, if known, of the person having or who may have present possession, custody, or control of such document or a copy thereof; and
  6. Whether or not any draft, copy, or reproduction of such document contains any postscripts, notation, change, or addendum not appearing on the document itself and, if so, the response shall give the description of each such draft, copy or reproduction.

Information Requested

  1. All policies and procedures related to the Strategy or the Taxpayer’s role or participation in it. 
  2. All documents that show, contain or reference any summaries of any kind about the Strategy, including but not limited to the persons who used it, the amount of fees Taxpayer earned in connection with it, the taxes avoided through the Strategy’s use, the specific financial instruments used to effect the Strategy, the dividends for which the Strategy was applied, and/or the Taxpayer’s actual or potential tax liabilities in connection with its role in the Strategy.  
  3. All documents containing any reports or evaluations concerning the Strategy, including but not limited to internal audit reports and other internal and external reviews concerning the Strategy’s implementation, promotion, merits, legality, or tax consequences.  These documents include all inter-company correspondence and correspondence between company personnel and non-company persons that constitute any such report or evaluation, including that sent or received by e-mail.          
  4. All promotional materials covering or related to the Strategy, and all other documents that describe the steps and objectives of the Strategy.
  5. All company bills or invoices issued to clients in connection with the Strategy.
  6. Samples of the transactional documents typically used in connection with the Strategy, including but not limited to sale and purchase agreements and confirmations; financial instrument agreements and confirmations; collateral and guarantee agreements; and financing arrangements and agreements. 
  7. The computer sensitive files, individually or in the aggregate, containing all the terms or attributes and payment history of the financial instruments used in the Strategy.
  8. The computer sensitive files, individually or in the aggregate, containing all the terms or attributes of the stocks used or acquired in connection with the Strategy, including the terms of their purchases and sales.
  9. All computer or hardcopy files or documents containing any index or other explanation of the terms or attributes referenced in items 7 and 8.   
  10. All engagement letters and similar letters and agreements with clients and other persons in connection with the Strategy.
  11. The names, titles, and addresses of personnel with oversight over each company department or division that effected the use of the Strategy.
  12. A signed statement, provided by a responsible company officer or employee, which indicates that a diligent search of the documents described in items 1 through 10 above was completed, and which includes the names of titles of the persons who conducted the search.  It should state that either all such documents have been produced that are in the company’s possession, custody, or control (subject to alleged privileges), or that the company did not engage in the Strategy and has none of the above-described documents.  It should further include a statement whether any other entities used the Strategy that are: (1) members in the same consolidated group as that of which the Taxpayer is a member or common parent for federal income tax purposes, or (2) foreign entities owned or controlled by the Taxpayer or its parent company.  


ATTACHMENT 2

Model IDR Withholding Strategy 2

Information Document Request
Form 1042 Examination

With respect to the Strategy as described in Information Document Request (IDR) No. XXX, please provide a signed statement from a responsible company official indicating whether, to the company’s knowledge, any of its accountholders used the Strategy during any time for the year(s) XXXX.  Such use is limited to that with respect to stocks held in accounts maintained or managed by your company at any time during the year(s) XXX. This response should consider the use of the Strategy without regard to the extent of the company’s own participation in it, as described in IDR no. XXX. For example, an affirmative response should be provided if any one or more of the company’s accountholders used the Strategy, without regard to whether or not the company itself acquired any stocks to effect the strategy and whether or not it engaged in any financial transactions in furtherance of it.

If an affirmative response is provided, please also provide documents that in the aggregate identify such accountholders. The signed statement should further indicate that a diligent and thorough search was made for such accounts and should identify, by name and current title, each person who participated in the search.     

The term “accountholder” refers to those persons or entities, classified or treated as foreign (i.e., non-U.S. citizens or residents) by the company, to which the company made payments of income, or otherwise effected security transactions for, directly or indirectly, in its capacity as a broker, custodian, clearing agent, fiduciary, or similar role.         


 ATTACHMENT 3

IDR #1

Department of the Treasury – Internal Revenue Service
Form 4564 – Information Document Request (IDR) – Attachment
Total Return Swap Fact Pattern One IDR

To: [Insert Name of Taxpayer]   

        

Tax Years(s):

 

IDR Request Number:

 

Date of Request:

 

Response Date:

 

Purpose of this IDR:

The IRS is aware of Total Return Swaps (TRS) that were executed with respect to U.S. source dividend income paid to non-resident alien individuals, foreign partnerships and foreign corporations (each, a “Foreign Person”). Some taxpayers and withholding agents contend that the payments made pursuant to these swap transactions are foreign source pursuant to Treas. Reg. § 1.863-7 and therefore not subject to U.S. withholding tax. The purpose of this IDR is to determine whether [Insert Name of Taxpayer] (the taxpayer) has directly or indirectly participated in such a TRS by acquiring information and documents.

Definition of Key Terms

U.S. Financial Institution – Domestic organization that provides financial services and financial products; and any United States branch of a foreign bank.

Substantially Similar – The term substantially similar includes any transaction that is expected to obtain the same or similar tax consequences and that is either factually similar or based on the same or similar tax strategy.

U.S. Equity Security – an equity security issued by a publicly-traded or privately-held U.S. corporation.

Foreign Person – Non-resident alien individuals, foreign partnerships, foreign trusts, foreign estates, and foreign corporations for U.S. federal income tax purposes.

Non-identical Copies – The term non-identical copies as used in the IDR refers to all copies of the same document, including those with comments, notes, handwriting, strikethroughs, etc.

Description of Documents Requested

For each request, please provide full and complete documents and provide non-identical copies of all items requested. Please also note and explain any deviations between the original documents and the copies.

Please provide the following items:

  1. A detailed description of any transaction and substantially similar transactions, including all material facts in which the following occurred:
    1. Foreign Person sells U.S. Equity Securities to U.S. Financial Institution (“cross-in”);
    2. Foreign Person enters into TRS referencing the same U.S. Equity Securities sold to the U.S. Financial Institution by the Foreign Person and the notional amount of the TRS is less than or equal to the actual price of the U.S. Equity Securities sold to the U.S. Financial Institution. Pursuant to the terms of the TRS, the Foreign Person is required to make payments to its counterparty based on an interest component (such as a LIBOR-based payment) and any depreciation with respect to the notional investment in the U.S. Equity Securities. The counterparty is required to make payments to the Foreign Person in an amount equal to any appreciation with respect to the notional investment in the U.S. Equity Securities and any dividend paid with respect to the U.S. Equity Securities; and
    3. After the dividend record date or dates, the Foreign Person terminates the TRS and at the same time repurchases the U.S. Equity Securities from the U.S. Financial Institution (“cross-out”).
  2. For each of the equity transactions corresponding to the related total return swaps identified in No. 1 above, please provide the following information in electronic form:
    1. Name of security, ticker and CUSIP number
    2. Name of buy trader
    3. Name of buy counterparty and country
    4. Type of counterparty (IDB [Interdealer-Broker], swap counterparty, hedge fund, market, etc.)
    5. Trade date of buy
    6. Settlement date of buy
    7. Price per share of security purchased
    8. Pricing mechanism (MOC, VWAP [Volume-Weighted-Average-Price], etc.)
    9. Number of shares purchased
    10. Terms of purchase and sale
    11. Dividend record date(s)
    12. Amount of dividend(s)
    13. Name of sale trader
    14. Name of sale counterparty and country
    15. Type of counterparty (IDB, swap counterparty, hedge fund, market, etc.)
    16. Trade date(s) of sale
    17. Settlement date(s) of sale
    18. Price per share of security sold
    19. Number of shares sold.
  3. For each transaction described in No. 1 above, please provide the following information in electronic form with respect to the TRS:
    1. Name of underlying security, ticker and CUSIP number
    2. Name of swap acquisition trader
    3. Name of swap counterparty and country
    4. Type of counterparty (IDB, hedge fund, etc.)
    5. Trade date of swap
    6. Settlement date
    7. Price per share
    8. Number of shares
    9. Original termination date
    10. Swap offset dates and details of offset
    11. Dates, amounts, descriptions and computation of each swap payment
    12. Finance rate
    13. Notional Amount
    14. Early swap termination date
    15. Name of swap termination trader
    16. Price per share of underlying security when swap terminated.
  4. Please list cash amounts and dates of each Cross-In where Foreign Person sold U.S. equity security to U.S. Financial Institution if U.S. Financial Institution in fact did transfer cash (sales proceeds after netting the initial margin of transactions described in No. 1 above) to Foreign Person or for offset obligation owed by Foreign Investor.
  5. Identify and describe any transactions in No. 1 above for which the reference prices in and the prices at which the U.S. equity security was sold or purchased in the cross-in or cross-out are same prices or are based on same prices, such as market on close or VWAP.
  6. Please provide any information identifying the dollar amounts involved in the transaction. Taxpayers should identify all general ledger accounts that are affected by the transaction, and also should trace all identified items and amounts to the line items on their tax returns.
  7. Complete copies of all documents and other materials, including legal opinions and correspondence, provided to the taxpayer by any party that promoted, solicited, or recommended the transaction.
  8. Complete copies of documents that were used in the decision making process, including but not limited to information presented to the board of directors, audit committee, group or individual, finance committee, group or individual, compensation committee, group or individual, growth committee, group or individual, and/or any other special or ad hoc committee(s), groups or individuals, as applicable.
  9. Please provide any spread sheets used by the U.S. Financial Institution to calculate the price of any transaction described in No. 1 above.
  10. Identify and describe any transactions in No. 1 above with a commission of $0.01 per share or less.
  11. Identify and describe any transactions in No. 1 above that allowed Foreign Person to retain voting rights in the underlying U.S. equity security.
  12. Identify any transactions in No. 1 above in which the U.S. Financial Institution cast any vote with respect to the underlying U.S. equity security and describe the process that the U.S. Financial Institution used to determine how to cast its vote.
  13. For each transaction identified in No. 1 above, describe the manner in which the initial cross-in was funded by U.S. Financial Institution, for instance, were proceeds of the cross-in offset by other obligations of Foreign Person and, if so, identify the obligation(s) offset, including date obligation was established, amount of obligation, and purpose of obligation.
  14. For each transaction identified in No. 1 above, list the amount and location of any known accounts holding sale proceeds held as collateral or as margin by U.S. Financial Institution (or held for benefit of U.S. Financial Institution) to secure Foreign Person’s obligations.
  15. Provide complete and un-redacted conference call or meeting notes and minutes discussing the described transactions in No. 1 above, including notes and minutes of the board of directors, audit committee, finance committee, compensation committee, growth and marketing committee, and/or any other special or ad hoc committee(s), groups or individuals, as applicable to the decision making process for the transaction.
  16. Provide all legal, accounting, financial, tax and economic opinions and related correspondence secured by or on behalf of the taxpayer in connection with the transaction.
  17. Provide tax, legal, operating, supervisory or similar guidelines, including exception reports, used by the U.S. Financial Institution in connection with TRS transactions.
  18. Provide all records of sales, purchases, contracts, contractual obligations, lending arrangement, other financial instruments and any other documentation related to any transaction described in No. 1 above.
  19. Provide all promotional and marketing materials used by the U.S. Financial Institution in connection with any transaction described in No. 1 above.
  20. Provide all correspondence sent or received (both internal and external communications), including but not limited to e-mail messages, Bloomberg messages and letters, relating to any transaction described in No. 1 above.
  21. list of all known participants of any transaction described in No. 1 above, including a description of their roles and responsibilities.
  22. The names and addresses of all known parties that promoted, solicited, or recommended the transaction and to whom the taxpayer paid fees, compensation or other remuneration in connection with the taxpayer’s decision to participate in any transaction described in No. 1 above.
  23. The taxpayer should provide the name(s) and job title(s) of the officers and other employees or former employees of the taxpayer who are familiar with the transaction and who may be available to meet with representatives of the Service within two weeks of the date of this IDR.
  24. For each document withheld because of a claim of privilege, if any, please provide the following information:
    1. The name and title of the author;
    2. The date of the document;
    3. The names, titles, and addresses of all recipients of the documents, including persons to whom the document was made available to some time after it was created (e.g., the taxpayer’s independent auditor);
    4. The subject matter of the document;
    5. The privilege claimed
    6. The engagement letter or other agreements pursuant to which the item was created, prepared, or assembled by any person other than an employee of the taxpayer;
    7. The portions of the document for which there is no claim of privilege; and
    8. For any opinion or memoranda described in item 8 above, the conclusions reached in the opinion or memorandum.

Delivery Instructions for Documents in Electronic Format:

  1. To the extent documents are stored in computerized, electronic media or other machine-sensible formats, please provide a copy of the electronic file in its native format. For example, if your electronic documents were created and used in Microsoft Word, PowerPoint, etc., do not convert the documents to a different format, such as a Tagged Image File Format (TIFF) or a Portable Document File (PDF), in preparation for producing the documents pursuant to this request. Please provide the documents in an unprotected form that will allow them to be printed, electronically searched, and analyzed.
  2. Each document produced should be an exact unaltered image, produced as a multi-page, searchable image, such as PDF text mode, that treats each complete document as a discrete file.
  3. These documents should be produced in read-only form on CD, DVD, or hard drive.
  4. To ensure readability of any requested document in electronic format, provide the files with an image resolution of at least 300 dots per inch (dpi).
  5. To the extent that any electronic indexes or other listings relating to the requested documents are created in preparation for submitting them to the Internal Revenue Service, please provide that information with your response to assist in organizing and reviewing the documents.
  6. For delivery purposes, it is also preferred that the documents be produced and organized with load files from commercially available software, such as Summation, IPRO, Concordance, etc. This request is not intended to seek the submission of a proprietary executable file, nor should it be interpreted to do so.
  7. If the electronic data provided cannot be read or efficiently searched or processed with commercially available software, then provide copies of any proprietary software necessary to retrieve and analyze the requested documents and data, plus all manuals and similar documents related to using this software.

Revision Date 08/31/2009


ATTACHMENT 4

IDR #2

Department of the Treasury – Internal Revenue Service
Form 4564 – Information Document Request (IDR) – Attachment
Total Return Swap Fact Pattern Two IDR

To:[Insert Name of Taxpayer]   

        

Tax Years(s):

 

IDR Request Number:

 

Date of Request:

 

Response Date:

 

Purpose of this IDR:

The IRS is aware of Total Return Swaps (TRS) that were executed with respect to U.S. source dividend income paid to non-resident alien individuals, foreign partnerships, and foreign corporations (each, a “Foreign Person”). Some taxpayers and withholding agents contend that the payments made pursuant to these swap transactions are foreign source pursuant to Treas. Reg. § 1.863-7 and therefore not subject to U.S. withholding tax. The purpose of this IDR is to determine whether [Insert Name of Taxpayer] (the taxpayer) has directly or indirectly participated in such a TRS by acquiring information and documents.

Definition of Key Terms

U.S. Financial Institution – Domestic organization that provides financial services and financial products; and any United States branch of a foreign bank.

Substantially Similar – The term substantially similar includes any transaction that is expected to obtain the same or similar tax consequences and that is either factually similar or based on the same or similar tax strategy.

U.S. Equity Security – an equity security issued by a publicly-traded or privately-held U.S. corporation.

Foreign Person – Non-resident alien individuals, foreign partnerships, foreign trusts, foreign estates, and foreign corporations for U.S. federal income tax purposes.

U.S. Financial Institution Affiliate – Any party affiliated, related or associated with the U.S. Financial Institution.

Non-identical Copies – The term non-identical copies as used in the IDR refers to all copies of the same document, including those with comments, notes, handwriting, strikethroughs, etc.

Description of Documents Requested

For each request, please provide full and complete documents and provide non-identical copies of all items requested. Please also note and explain any deviations between the original documents and the copies. Please provide the following items:

  1. A detailed description of any transaction and substantially similar transactions, including all material facts in which the following occurred:
    1. Foreign Person sells U.S. Equity Securities to U.S. Financial Institution (“cross-in”);
    2. Foreign Person enters into TRS referencing the same U.S. Equity Securities sold to the U.S. Financial Institution by the Foreign Person and the notional amount of the TRS is less than or equal to the fair market value of the U.S. Equity Securities sold to the U.S. Financial Institution. Pursuant to the terms of the TRS, the Foreign Person is required to make payments to its counterparty based on an interest component (such as a LIBOR-based payment) and any depreciation with respect to the notional investment in the U.S. Equity Securities. The counterparty is required to make payments to the Foreign Person in an amount equal to any appreciation with respect to the notional investment in the U.S. Equity Securities and any dividend paid with respect to the U.S. Equity Securities;
    3. After the dividend record date or dates, the TRS is terminated and at the same time an unrelated Third Party, including an IDB or some other person, purchases the U.S. Equity Securities from the U.S. Financial Institution; and
    4. Foreign Person repurchases U.S. Equity Securities from the same unrelated Third Party (“cross-out”). Alternatively, Foreign Person and the U.S. Financial Institution use MOC (Market-On-Close) or other pricing method to calculate a termination payment under the TRS that corresponds to the price used by unrelated Third Party and Foreign Person for Foreign Person’s reacquisition of the U.S. Equity Securities.
  2. For each of the equity transactions corresponding to the related total return swaps identified in No. 1 above, please provide the following information in electronic form:
    1. Name of security, ticker and CUSIP number
    2. Name of buy trader
    3. Name of buy counterparty and country
    4. Type of counterparty (IDB, swap counterparty, hedge fund, market, etc.)
    5. Trade date of buy
    6. Settlement date of buy
    7. Price per share of security purchased
    8. Pricing mechanism (MOC, VWAP [Volume-Weighted-Average-Price], etc.)
    9. Number of shares purchased
    10. Terms of purchase and sale
    11. Dividend record date(s)
    12. Amount of dividend(s)
    13. Name of sale trader
    14. Name of sale counterparty and country
    15. Type of counterparty (IDB, swap counterparty, hedge fund, market, etc.)
    16. Trade date(s) of sale
    17. Settlement date(s) of sale
    18. Price per share of security sold
    19. Number of shares sold.
  3. For each transaction described in No. 1 above, please provide the following information in electronic form with respect to the TRS:
    1. Name of underlying security, ticker and CUSIP number
    2. Name of swap acquisition trader
    3. Name of swap counterparty and country
    4. Type of counterparty (IDB, hedge fund, etc.)
    5. Trade date of swap
    6. Settlement date
    7. Price per share
    8. Number of shares
    9. Original termination date
    10. Swap offset dates and details of offset
    11. Dates, amounts, descriptions and computation of each swap payment
    12. Finance rate
    13. Notional Amount
    14. Early swap termination date
    15. Name of swap termination trader
    16. Price per share of underlying security when swap terminated.
  4. Identify and describe any transactions in No. 1 above where U.S. Financial Institution sold U.S. Equity Securities (that were previously held as a TRS hedge) to an IDB that then sold the same U.S. Equity Securities to the Foreign Person.
  5. Identify and describe any transactions in No. 1 above where U.S. Financial Institution sold U.S. Equity Securities (previously held as TRS hedge) to an IDB, and U.S. Financial Institution also provided information/identity regarding the Foreign Person to the IDB (as possible purchaser of the U.S. Equity Securities) or provided information/identity regarding the IDB to the Foreign Person (as possible seller of the U.S. Equity Securities).
  6. Identify and describe any transactions in No. 1 above that require Foreign Person to bear any or all of the U.S. Financial Institution’s costs of hedging its short TRS position. Please provide the terms and documents relating to the financing obtained by the U.S. Financial Institution to hedge its short TRS position.
  7. Please list cash amounts and dates of each Cross-In where Foreign Person sold U.S. Equity Securities to U.S. Financial Institution if U.S. Financial Institution in fact did transfer cash (sales proceeds after netting the initial margin of transactions described in No. 1 above) to Foreign Person or for offset obligation owed by Foreign Investor.
  8. Identify and describe any transactions in No. 1 above for which the reference prices in and the prices at which the U.S. Equity Securities was sold or purchased in the cross-in or cross-out are same prices or are based on same prices, such as market on close or VWAP.
  9. Please provide any information identifying the dollar amounts involved in the transaction. Taxpayers should identify all general ledger accounts that are affected by the transaction, and also should trace all identified items and amounts to the line items on their tax returns.
  10. Complete copies of all documents and other materials, including legal opinions and correspondence, provided to the taxpayer by any party that promoted, solicited, or recommended the transaction.
  11. Complete copies of documents that were used in the decision making process, including but not limited to information presented to the board of directors, audit committee, group or individual, finance committee, group or individual, compensation committee, group or individual, growth committee, group or individual, and/or any other special or ad hoc committee(s), groups or individuals, as applicable.
  12. Please provide any spread sheets used by the U.S. Financial Institution to calculate the price of any transaction described in No. 1 above.
  13. Identify and describe any transactions in No. 1 above with a commission of $0.01 per share or less.
  14. Identify and describe any transactions in No. 1 above that allowed Foreign Person to retain voting rights in the underlying U.S. Equity Securities.
  15. Identify any transactions in No. 1 above in which the U.S. Financial Institution cast any vote with respect to the underlying U.S. Equity Securities and describe the process that the U.S. Financial Institution used to determine how to cast its vote.
  16. For each transaction identified in No. 1 above, describe the manner in which the initial cross-in was funded by U.S. Financial Institution, for instance, were proceeds of the cross-in offset by other obligations of Foreign Person and, if so, identify the obligation(s) offset, including date obligation was established, amount of obligation, and purpose of obligation.
  17. For each transaction identified in No. 1 above, list the amount and location of any known accounts holding sale proceeds held as collateral or as margin by U.S. Financial Institution (or held for benefit of U.S. Financial Institution) to secure Foreign Person’s obligations.
  18. Provide complete and un-redacted conference call or meeting notes and minutes discussing the described transactions in No. 1 above, including notes and minutes of the board of directors, audit committee, finance committee, compensation committee, growth and marketing committee, and/or any other special or ad hoc committee(s), groups or individuals, as applicable to the decision making process for the transaction.
  19. Provide all legal, accounting, financial, tax and economic opinions and related correspondence secured by or on behalf of the taxpayer in connection with the transaction.
  20. Provide tax, legal, operating, supervisory or similar guidelines, including exception reports, used by the U.S. Financial Institution in connection with TRS transactions.
  21. Provide all records of sales, purchases, contracts, contractual obligations, lending arrangement, other financial instruments and any other documentation related to any transaction described in No. 1 above.
  22. Provide all promotional and marketing materials used by the U.S. Financial Institution in connection with any transaction described in No. 1 above.
  23. Provide all correspondence sent or received (both internal and external communications), including but not limited to e-mail messages, Bloomberg messages and letters, relating to any transaction described in No. 1 above.
  24. A list of all known participants any transaction described in No. 1 above, including a description of their roles and responsibilities.
  25. The names and addresses of all known parties that promoted, solicited, or recommended the transaction and to whom the taxpayer paid fees, compensation or other remuneration in connection with the taxpayer’s decision to participate in any transaction described in No. 1 above.
  26. Taxpayers should provide the name(s) and job title(s) of the officers and other employees or former employees of the taxpayer who are familiar with the transaction and who may be available to meet with representatives of the Service within two weeks of the date of this IDR.
  27. For each document withheld because of a claim of privilege, if any, please provide the following information:
    1. The name and title of the author;
    2. The date of the document;
    3. The names, titles, and addresses of all recipients of the documents, including persons to whom the document was made available to some time after it was created (e.g., the taxpayer’s independent auditor);
    4. The subject matter of the document;
    5. The privilege claimed;
    6. The engagement letter or other agreements pursuant to which the item was created, prepared, or assembled by any person other than an employee of the taxpayer;
    7. The portions of the document for which there is no claim of privilege; and
    8. For any opinion or memoranda described in item 8 above, the conclusions reached in the opinion or memorandum.

Delivery Instructions for Documents in Electronic Format:

  1. To the extent documents are stored in computerized, electronic media or other machine-sensible formats, please provide a copy of the electronic file in its native format. For example, if your electronic documents were created and used in Microsoft Word, PowerPoint, etc., do not convert the documents to a different format, such as a Tagged Image File Format (TIFF) or a Portable Document File (PDF), in preparation for producing the documents pursuant to this request. Please provide the documents in an unprotected form that will allow them to be printed, electronically searched, and analyzed.
  2. Each document produced should be an exact unaltered image, produced as a multi-page, searchable image, such as PDF text mode, that treats each complete document as a discrete file.
  3. These documents should be produced in read-only form on CD, DVD, or hard drive.
  4. To ensure readability of any requested document in electronic format, provide the files with an image resolution of at least 300 dots per inch (dpi).
  5. To the extent that any electronic indexes or other listings relating to the requested documents are created in preparation for submitting them to the Internal Revenue Service, please provide that information with your response to assist in organizing and reviewing the documents.
  6. For delivery purposes, it is also preferred that the documents be produced and organized with load files from commercially available software, such as Summation, IPRO, Concordance, etc. This request is not intended to seek the submission of a proprietary executable file, nor should it be interpreted to do so.
  7. If the electronic data provided cannot be read or efficiently searched or processed with commercially available software, then provide copies of any proprietary software necessary to retrieve and analyze the requested documents and data, plus all manuals and similar documents related to using this software.

Revision Date: 08/31/2009


ATTACHMENT 5 

IDR #3

Department of the Treasury – Internal Revenue Service
Form 4564 – Information Document Request (IDR) – Attachment
Total Return Swap Fact Pattern Three IDR

To:[Insert Name of Taxpayer]   

    

Tax Years(s):

 

IDR Request Number:

 

Date of Request:

 

Response Date:

 

Purpose of this IDR:

The IRS is aware of Total Return Swaps (TRS) that were executed with respect to U.S. source dividend income paid to non-resident alien individuals, foreign partnerships, and foreign corporations (each, a “Foreign Person”). Some taxpayers and withholding agents contend that the payments made pursuant to these swap transactions are foreign source pursuant to Treas. Reg. § 1.863-7 and therefore not subject to U.S. withholding tax. The purpose of this IDR is to determine whether [Insert Name of Taxpayer] (the taxpayer) has directly or indirectly participated in such a TRS by acquiring information and documents.

Definition of Key Terms

U.S. Financial Institution – Domestic organization that provides financial services and financial products; and any United States branch of a foreign bank.

Substantially Similar – The term substantially similar includes any transaction that is expected to obtain the same or similar tax consequences and that is either factually similar or based on the same or similar tax strategy.

U.S. Equity Security – an equity security issued by a publicly-traded or privately-held U.S. corporation.

Foreign Person – Non-resident alien individuals, foreign partnerships, foreign trusts, foreign estates, and foreign corporations for U.S. federal income tax purposes.

U.S. Financial Institution Affiliate – Any party affiliated, related or associated with the U.S. Financial Institution.

Non-identical Copies – The term non-identical copies as used in the IDR refers to all copies of the same document, including those with comments, notes, handwriting, strikethroughs, etc.

Description of Documents Requested

For each request, please provide full and complete documents and provide non-identical copies of all items requested. Please also note and explain any deviations between the original documents and the copies.

Please provide the following items:

  1. A detailed description of any transaction and substantially similar transactions, including all material facts in which the following occurred:
    1. Foreign Person sells U.S. Equity Securities to U.S. Financial Institution or U.S. Financial Institution Affiliate (“cross-in”);
    2. Foreign Person enters into TRS with a foreign U.S. Financial Institution Affiliate referencing the same U.S. Equity Securities sold to the U.S. Financial Institution or affiliate by the Foreign Person and the notional amount of the TRS is less than or equal to the fair market value of the U.S. Equity Securities sold to the U.S. financial institution. Pursuant to the terms of the TRS, the Foreign Person is required to make payments to its counterparty based on an interest component (such as a LIBOR-based payment) and any depreciation with respect to the notional investment in the U.S. Equity Securities. The counterparty is required to make payments to the Foreign Person in an amount equal to any appreciation with respect to the notional investment in the U.S. Equity Securities and any dividend paid with respect to the U.S. Equity Securities; and
    3. After the dividend record date or dates, the TRS is terminated and at the same time the Foreign Person repurchases U.S. equity security from U.S. Financial Institution or its Affiliate (“cross-out”). Alternatively, Foreign Person and the U.S. Financial Institution Affiliate may achieve the effect of a cross-out in transactions that use MOC (Market-On-Close) to calculate the termination payment under the TRS and to determine the purchase price of the U.S. Equity Securities reacquired by the Foreign Person.
  2. For each of the equity transactions corresponding to the related total return swaps identified in No. 1 above, please provide the following information in electronic form:
    1. Name of security, ticker and CUSIP number
    2. Name of buy trader
    3. Name of buy counterparty and country
    4. Type of counterparty (IDB [Interdealer-broker], swap counterparty, hedge fund, market, etc.)
    5. Trade date of buy
    6. Settlement date of buy
    7. Price per share of security purchased
    8. Pricing mechanism (MOC, VWAP [Volume-Weighted-Average-Price], etc.)
    9. Number of shares purchased
    10. Terms of purchase and sale
    11. Dividend record date(s)
    12. Amount of dividend(s)
    13. Name of sale trader
    14. Name of sale counterparty and country
    15. Type of counterparty (IDB, swap counterparty, hedge fund, market, etc.)
    16. Trade date(s) of sale
    17. Settlement date(s) of sale
    18. Price per share of security sold
    19. Number of shares sold.
  3. For each transaction described in No. 1 above, please provide the following information in electronic form with respect to the TRS:
    1. Name of underlying security, ticker and CUSIP number
    2. Name of swap acquisition trader
    3. Name of swap counterparty and country
    4. Type of counterparty (IDB, hedge fund, etc.)
    5. Trade date of swap
    6. Settlement date
    7. Price per share
    8. Number of shares
    9. Original termination date
    10. Swap offset dates and details of offset
    11. Dates, amounts, descriptions and computation of each swap payment
    12. Finance rate
    13. Notional Amount
    14. Early swap termination date
    15. Name of swap termination trader
    16.  Price per share of underlying security when swap terminated.
  4. Identify and describe any transactions in No. 1 above where U.S. Financial Institution sold U.S. U.S. Equity Securities (that were previously held as a TRS hedge) to a U.S. Financial Institution Affiliate that then sold the same U.S. U.S. Equity Securities to the Foreign Person.
  5. Identify and describe any transactions in No. 1 above where U.S. Financial Institution sold U.S. Equity Securities (previously held as TRS hedge) to a U.S. Financial Institution Affiliate, and U.S. Financial Institution also provided information/identity regarding the Foreign Person to the U.S. Financial Institution Affiliate (as possible purchaser of the U.S. Equity Securities ) or provided information/identity regarding the U.S. Financial Institution Affiliate to the Foreign Person (as a possible seller of the U.S. Equity Securities ).
  6. Identify and describe any transactions in No. 1 above that require Foreign Person to bear any or all of the U.S. Financial Institution’s costs of hedging its short TRS position. Please provide the terms and documents relating to the financing obtained by the U.S. Financial Institution to hedge its short TRS position.
  7. Please list cash amounts and dates of each Cross-In where Foreign Person sold U.S. equity security to U.S. Financial Institution or its affiliate if U.S. Financial Institution or its affiliate in fact did transfer cash (sales proceeds after netting the initial margin of transactions described in No. 1 above) to Foreign Person or for offset obligation owed by Foreign Investor.
  8. Identify and describe any transactions in No. 1 above for which the reference prices in and the prices at which the U.S. equity security was sold or purchased in the cross-in or cross-out are same prices or are based on same prices, such as market on close or VWAP.
  9. Please provide any information identifying the dollar amounts involved in the transaction. Taxpayers should identify all general ledger accounts that are affected by the transaction, and also should trace all identified items and amounts to the line items on their tax returns.
  10. Complete copies of all documents and other materials, including legal opinions and correspondence, provided to the taxpayer by any party that promoted, solicited, or recommended the transaction.
  11. Complete copies of documents that were used in the decision making process, including but not limited to information presented to the board of directors, audit committee, group or individual, finance committee, group or individual, compensation committee, group or individual, growth committee, group or individual, and/or any other special or ad hoc committee(s), groups or individuals, as applicable.
  12. Please provide any spread sheets used by the U.S. Financial Institution to calculate the price of any transaction described in No. 1 above.
  13. Identify and describe any transactions in No. 1 above with a commission under of $0.01 per share or less.
  14. Identify and describe any transactions in No. 1 above that allowed Foreign Person to retain voting rights in the underlying U.S. equity security.
  15. Identify any transactions in No. 1 above in which the U.S. Financial Institution cast any vote with respect to the underlying U.S. equity security and describe the process that the U.S. Financial Institution used to determine how to cast its vote.
  16. For each transaction identified in No. 1 above, describe the manner in which the initial cross-in was funded by U.S. Financial Institution, for instance, were proceeds of the cross-in offset by other obligations of Foreign Person and, if so, identify the obligation(s) offset, including date obligation was established, amount of obligation, and purpose of obligation.
  17. For each transaction identified in No. 1 above, list the amount and location of any known accounts holding sale proceeds held as collateral or as margin by U.S. Financial Institution (or held for benefit of U.S. Financial Institution) to secure Foreign Person’s obligations.
  18. Provide complete and un-redacted conference call or meeting notes and minutes discussing the described transactions in No. 1 above, including notes and minutes of the board of directors, audit committee, finance committee, compensation committee, growth and marketing committee, and/or any other special or ad hoc committee(s), groups or individuals, as applicable to the decision making process for the transaction.
  19. Provide all legal, accounting, financial, tax and economic opinions and related correspondence secured by or on behalf of the taxpayer in connection with the transaction.
  20. Provide tax, legal, operating, supervisory or similar guidelines, including exception reports, used by the U.S. Financial Institution in connection with TRS transactions.
  21. Provide all records of sales, purchases, contracts, contractual obligations, lending arrangement, other financial instruments and any other documentation related to any transaction described in No. 1 above.
  22. Provide all promotional and marketing materials used by the U.S. Financial Institution in connection with any transaction described in No. 1 above.
  23. Provide all correspondence sent or received (both internal and external communications), including but not limited to e-mail messages, Bloomberg messages and letters, relating to any transaction described in No. 1 above.
  24. A list of all known participants any transaction described in No. 1 above, including a description of their roles and responsibilities.
  25. The names and addresses of all known parties that promoted, solicited, or recommended the transaction and to whom the taxpayer paid fees, compensation or other remuneration in connection with the taxpayer’s decision to participate in any transaction described in No. 1 above.
  26. Taxpayers should provide the name(s) and job title(s) of the officers and other employees or former employees of the taxpayer who are familiar with the transaction and who may be available to meet with representatives of the Service within two weeks of the date of this IDR.
  27. For each document withheld because of a claim of privilege, if any, please provide the following information:
    1. The name and title of the author;
    2. The date of the document;
    3. The names, titles, and addresses of all recipients of the documents, including persons to whom the document was made available to some time after it was created (e.g., the taxpayer’s independent auditor);
    4. The subject matter of the document;
    5. The privilege claimed;
    6. The engagement letter or other agreements pursuant to which the item was created, prepared, or assembled by any person other than an employee of the taxpayer;
    7. The portions of the document for which there is no claim of privilege; and
    8. For any opinion or memoranda described in item 8 above, the conclusions reached in the opinion or memorandum.

Delivery Instructions for Documents in Electronic Format:

  1. To the extent documents are stored in computerized, electronic media or other machine-sensible formats, please provide a copy of the electronic file in its native format. For example, if your electronic documents were created and used in Microsoft Word, PowerPoint, etc., do not convert the documents to a different format, such as a Tagged Image File Format (TIFF) or a Portable Document File (PDF), in preparation for producing the documents pursuant to this request. Please provide the documents in an unprotected form that will allow them to be printed, electronically searched, and analyzed.
  2. Each document produced should be an exact unaltered image, produced as a multi-page, searchable image, such as PDF text mode, that treats each complete document as a discrete file.
  3. These documents should be produced in read-only form on CD, DVD, or hard drive.
  4. To ensure readability of any requested document in electronic format, provide the files with an image resolution of at least 300 dots per inch (dpi).
  5. To the extent that any electronic indexes or other listings relating to the requested documents are created in preparation for submitting them to the Internal Revenue Service, please provide that information with your response to assist in organizing and reviewing the documents.
  6. For delivery purposes, it is also preferred that the documents be produced and organized with load files from commercially available software, such as Summation, IPRO, Concordance, etc. This request is not intended to seek the submission of a proprietary executable file, nor should it be interpreted to do so.
  7. If the electronic data provided cannot be read or efficiently searched or processed with commercially available software, then provide copies of any proprietary software necessary to retrieve and analyze the requested documents and data, plus all manuals and similar documents related to using this software.

Revision Date: 08/31/2009


ATTACHMENT 6

IDR #4

Department of the Treasury – Internal Revenue Service
Form 4564 – Information Document Request (IDR) – Attachment
Total Return Swap Fact Pattern Four IDR

To:[Insert Name of Taxpayer]    

       

Tax Years(s):

 

IDR Request Number:

 

Date of Request:

 

Response Date:

 

Purpose of this IDR:

The IRS is aware of Total Return Swaps (TRS) that were executed with respect to U.S. source dividend income paid to non-resident alien individuals, foreign partnerships, and foreign corporations (each, a “Foreign Person”). Some taxpayers and withholding agents contend that the payments made pursuant to these swap transactions are foreign source pursuant to Treas. Reg. § 1.863-7 and therefore not subject to U.S. withholding tax. The purpose of this IDR is to determine whether [Insert Name of Taxpayer] (the taxpayer) has directly or indirectly participated in such a TRS by acquiring information and documents.

Definition of Key Terms

U.S. Financial Institution – Domestic organization that provides financial services and financial products; and any United States branch of a foreign bank.

Substantially Similar – The term substantially similar includes any transaction that is expected to obtain the same or similar tax consequences and that is either factually similar or based on the same or similar tax strategy.

U.S. Equity Security – an equity security issued by a publicly-traded or privately-held U.S. corporation.

Foreign Person – Non-resident alien individuals, foreign partnerships, foreign trusts, foreign estates, and foreign corporations for U.S. federal income tax purposes.

U.S. Financial Institution Affiliate – Any party affiliated, related or associated with the U.S. Financial Institution.

Non-identical Copies – The term non-identical copies as used in the IDR refers to all copies of the same document, including those with comments, notes, handwriting, strikethroughs, etc. s used in the IDR refers to all copies of the same document, including those with comments, notes, handwriting, strikethroughs, etc.

Description of Documents Requested

For each request, please provide full and complete documents and provide non-identical copies of all items requested. Please also note and explain any deviations between the original documents and the copies.

Please provide the following items:

  1. Please provide the following identified items and documents for each of the below-described responsive transactions:

    Foreign person enters into a TRS with the U.S. Financial Institution. The TRS references U.S. Equity Securities. Pursuant to the terms of the TRS, the Foreign Person is required to make payments to its counterparty based on an interest component (such as a LIBOR-based payment) and any depreciation with respect to the notional investment in the U.S. Equity Securities. The counterparty is required to make payments to the Foreign Person in an amount equal to any appreciation with respect to the notional investment in the U.S. Equity Securities and any dividend paid with respect to the U.S. Equity Securities. The responsive transactions are these transactions that satisfy one or more of the below criteria:
    1. Terms of the transaction require U.S. Financial Institution to hedge its position under the TRS in a particular manner (i.e., by holding the underlying) and/or require U.S. Financial Institution to consult with Foreign Person or in anyway give control or discretion to Foreign Person regarding the terms or disposition of the hedge, including duty to consult with Foreign Investor before effecting the hedge;
    2. the U.S. Financial Institution required 50% or more initial margin on the TRS;
    3. U.S. Financial Institution sold U.S. U.S. Equity Securities (that was previously held as a TRS hedge) to either the Foreign Person directly or to a Third party that then sold the U.S. U.S. Equity Securities to the Foreign Person;
    4. U.S. Financial Institution sold U.S. Equity Securities (previously held as TRS hedge) to a third party, and U.S. Financial Institution also provided information/identity regarding the Foreign Person to the third party (as possible purchaser of the U.S. Equity Securities ) or provided information/identity regarding the third party to the Foreign Person (as a possible seller);
    5. The Foreign Person was required to bear any or all of the U.S. Financial Institution’s costs of hedging its short TRS position. Please provide the terms and documents relating to the financing obtained by the U.S. Financial Institution to hedge its short TRS position;
    6. The TRS covering U.S. equity security in notional number of shares greater than 20% of the average daily trading volume determined on basis of the prior calendar month or 5% of public float of the U.S. Equity Securities;
    7. TRS references an underlying security that is equity interest in U.S. corporations or partnerships that are not widely held. Examples include privately held corporations, partnerships for which interests may offered only to thirty-five [35] or fewer Qualified Investors (as in Rule 506 of Regulation D), and publicly traded partnerships with less than ten thousand [10,000] investors; or
    8. The reference prices in and the prices at which the U.S. equity security used to hedge the TRS was sold or purchased are same prices or are based on same prices, such as MOC (Market-On-Close) or VWAP [Volume-Weighted-Average-Price].

      Please indicate which one or more of the above criteria were satisfied. If any transaction that satisfies the above criteria has already been identified as a transaction that is responsive to IDRs 1-3, indicate the other IDR to which the transaction is also responsive.
  2. For each transaction described in No. 1 above, please provide the following information in electronic form with respect to the TRS:
    1. Name of underlying security, ticker and CUSIP number
    2. Name of swap acquisition trader
    3. Name of swap counterparty and country
    4. Type of counterparty (IDB, hedge fund, etc.)
    5. Trade date of swap
    6. Settlement date
    7. Price per share
    8. Number of shares
    9. Original termination date
    10. Swap offset dates and details of offset
    11. Dates, amounts, descriptions and computation of each swap payment
    12. Finance rate
    13. Notional Amount
    14. Early swap termination date
    15. Name of swap termination trader
    16. Price per share of underlying security when swap terminated
    17. Dividend record date(s) of the underlying security
    18. Amount of dividend(s) paid with respect to the underlying security.
  3. Please provide any information identifying the dollar amounts involved in the transaction. Taxpayers should identify all general ledger accounts that are affected by the transaction, and also should trace all identified items and amounts to the line items on their tax returns.
  4. Complete copies of all documents and other materials, including legal opinions and correspondence, provided to the taxpayer by any party that promoted, solicited, or recommended the transaction.
  5. Complete copies of documents that were used in the decision making process, including but not limited to information presented to the board of directors, audit committee, group or individual, finance committee, group or individual, compensation committee, group or individual, growth committee, group or individual, and/or any other special or ad hoc committee(s), groups or individuals, as applicable.
  6. Please provide any spread sheets used by the U.S. Financial Institution to calculate the price of any transaction described in No. 1 above.
  7. Identify and describe any transactions in No. 1 above with a commission under of $0.01 per share or less.
  8. Identify and describe any transactions in No. 1 above that allowed Foreign Person to retain voting rights in the underlying U.S. equity security.
  9. Identify any transactions in No. 1 above in which the U.S. Financial Institution cast any vote with respect to the underlying U.S. equity security and describe the process that the U.S. Financial Institution used to determine how to cast its vote.
  10. For each transaction identified in No. 1 above, describe the manner in it was funded by U.S. Financial Institution, for instance, were payments received under the swap offset by other obligations of Foreign Person and, if so, identify the obligation(s) offset, including date obligation was established, amount of obligation, and purpose of obligation.
  11. For each transaction identified in No. 1 above, list the amount and location of any known accounts holding any proceeds held as collateral or as margin by U.S. Financial Institution (or held for benefit of U.S. Financial Institution) to secure Foreign Person’s obligations.
  12. Indicate and describe if U.S. Financial Institution offers automated program trading, where Foreign Person has an electronic link to the U.S. Financial Institution’s computer system, allowing the Foreign Person to order a TRS and related transactions, which are executed simultaneously and automatically by the U.S. Financial Institution computer system, with no human decision making on the U.S. Financial Institution’s side.
  13. Provide complete and un-redacted conference call or meeting notes and minutes discussing the described transactions in No. 1 above, including notes and minutes of the board of directors, audit committee, finance committee, compensation committee, growth and marketing committee, and/or any other special or ad hoc committee(s), groups or individuals, as applicable to the decision making process for the transaction.
  14. Provide all legal, accounting, financial, tax and economic opinions and related correspondence secured by or on behalf of the taxpayer in connection with the transaction.
  15. Provide tax, legal, operating, supervisory or similar guidelines, including exception reports, used by the U.S. Financial Institution in connection with TRS transactions.
  16. Provide all records of sales, purchases, contracts, contractual obligations, lending arrangement, other financial instruments and any other documentation related to any transaction described in No. 1 above.
  17. Provide all promotional and marketing materials used by the U.S. Financial Institution in connection with any transaction described in No. 1 above.
  18. Provide all correspondence sent or received (both internal and external communications), including but not limited to e-mail messages, Bloomberg messages and letters, relating to any transaction described in No. 1 above.
  19. A list of all known participants any transaction described in No. 1 above, including a description of their roles and responsibilities.
  20. The names and addresses of all known parties that promoted, solicited, or recommended the transaction and to whom the taxpayer paid fees, compensation or other remuneration in connection with the taxpayer’s decision to participate in any transaction described in No. 1 above.
  21. Taxpayers should provide the name(s) and job title(s) of the officers and other employees or former employees of the taxpayer who are familiar with the transaction and who may be available to meet with representatives of the Service within two weeks of the date of this IDR.
  22. For each document withheld because of a claim of privilege, if any, please provide the following information:
    1. The name and title of the author;
    2. The date of the document;
    3. The names, titles, and addresses of all recipients of the documents, including persons to whom the document was made available to some time after it was created (e.g., the taxpayer’s independent auditor);
    4. The subject matter of the document;
    5. The privilege claimed;
    6. The engagement letter or other agreements pursuant to which the item was created, prepared, or assembled by any person other than an employee of the taxpayer;
    7. The portions of the document for which there is no claim of privilege; and
    8. For any opinion or memoranda described in item 8 above, the conclusions reached in the opinion or memorandum.

Delivery Instructions for Documents in Electronic Format:

  1. To the extent documents are stored in computerized, electronic media or other machine-sensible formats, please provide a copy of the electronic file in its native format. For example, if your electronic documents were created and used in Microsoft Word, PowerPoint, etc., do not convert the documents to a different format, such as a Tagged Image File Format (TIFF) or a Portable Document File (PDF), in preparation for producing the documents pursuant to this request. Please provide the documents in an unprotected form that will allow them to be printed, electronically searched, and analyzed.
  2. Each document produced should be an exact unaltered image, produced as a multi-page, searchable image, such as PDF text mode, that treats each complete document as a discrete file.
  3. These documents should be produced in read-only form on CD, DVD, or hard drive.
  4. To ensure readability of any requested document in electronic format, provide the files with an image resolution of at least 300 dots per inch (dpi).
  5. To the extent that any electronic indexes or other listings relating to the requested documents are created in preparation for submitting them to the Internal Revenue Service, please provide that information with your response to assist in organizing and reviewing the documents.
  6. For delivery purposes, it is also preferred that the documents be produced and organized with load files from commercially available software, such as Summation, IPRO, Concordance, etc. This request is not intended to seek the submission of a proprietary executable file, nor should it be interpreted to do so.
  7. If the electronic data provided cannot be read or efficiently searched or processed with commercially available software, then provide copies of any proprietary software necessary to retrieve and analyze the requested documents and data, plus all manuals and similar documents related to using this software.

Revision Date: 08/31/2009

Page Last Reviewed or Updated: 16-Jan-2014