SECTION 1. SUMMARY

On October 14, 1997, final regulations were published in the Federal Register

[T.D. 8735], RIN 1545-AP71, (the “final regulations”) which source substitute interest and substitute dividend payments that are made pursuant to a securities lending or sale-repurchase transaction by reference to the income that would be earned with respect to the underlying transferred debt security or stock. The final regulations also provide that substitute interest and dividend payments that are U.S. source under the regulations are also characterized as interest and dividends for purposes of determining the fixed or determinable annual or periodical income of foreign resident individuals and corporations subject to tax under sections 871, 881, 4948(a) and Chapter 3 of the Internal Revenue Code and for purposes of granting tax treaty benefits with respect to interest and dividends. As promulgated, the final regulations were made applicable in all respects for substitute interest (as defined in § 1.861–2(a)(7) of the income tax regulations) and substitute dividend payments (as defined in § 1.861–3(a)(6)) made after November 13, 1997. This Notice provides guidance on complying with the statement requirement of section 871(h)(5) for substitute interest payments made after November 13, 1997, and before January 1, 1999. In addition, the Treasury and the Service intend to propose new regulations to provide specific guidance on how substitute dividend payments made by one foreign person to another foreign person (“foreign-to-foreign payments”) are to be treated. Until the proposed regulations are promulgated, this Notice clarifies how the amount of the tax imposed under §§ 1.871–7(b)(2) and 1.881–2(b)(2) will be determined with respect to foreign-to-foreign pay

ments. The Treasury and the Service request comments on the treatment of foreign-to-foreign payments provided in this Notice.