SECTION 1. PURPOSE — Internal Revenue Bulletin 2003-40

This notice provides guidance to brokers and individuals regarding provisions in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the JGTRRA), Pub. L. No. 108–27, 117 Stat. 752, that affect information reporting for payments in lieu of dividends (sometimes called “substitute payments”). This notice announces that:

The Internal Revenue Service will exercise its authority under section 6724(a) of the Internal Revenue Code to waive penalties under sections 6721 and 6722 for information returns with respect to calendar year 2003 payments if a broker makes a good faith effort to satisfy its information reporting obligations in a way that is consistent with the statutory changes effected by the JGTRRA.
The Service has revised the instructions to the 2003 Form 1099–MISC, “ Mis- cellaneous Income,” to require brokers to report payments in lieu of dividends to individuals in Box 8 of Form 1099–MISC.
The Service expects to revise Rev. Proc. 2003–28, 2003–16 I.R.B. 759, to allow brokers to furnish composite substitute payee statements for Forms 1099–DIV, “ Dividends and Distributions,” and Forms 1099–MISC, reporting payments in lieu of dividends, as well as other information returns.
If a payment in lieu of dividends is reported as dividend income on a 2003

Form 1099–DIV, the taxpayer receiving the form may treat the payment for tax purposes as a dividend, and not as a payment in lieu of dividends, unless the taxpayer knows, or has reason to know, of the actual character of the payment.

The Service expects to amend section 1.6045–2 of the Income Tax Regulations to reflect the statutory changes effected by the JGTRRA regarding payments in lieu of dividends. The Service expects to amend the regulations to provide new rules for brokers to use to determine which shares are loanable and to permit brokers to use a new hierarchical method to allocate transferred shares to new pools of loanable shares. The amendments are expected to be applicable to dividends received on or after January 1, 2003.