SECTION 2. BACKGROUND

Effective for taxable years beginning after December 31, 2002, and beginning before January 1, 2009, section 302 of the JGTRRA reduces the tax rate for “qualified dividends” paid to an individual shareholder to the same tax rate as capital gains. The reduced tax rate does not apply to a dividend on stock that is held (within the meaning of section 246(c)) by the taxpayer for 60 days or less of the 120-day period that begins 60 days before the ex-dividend date. The favorable tax rate is also denied to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

The legislative history states, however, that “Payments in lieu of dividends are not eligible for the lower rates.” H.R. REP. NO. 108–94, 108 ^th Cong., 1 ^st Sess. 31 n.36 (2003). (The distinction between payments made with respect to a financial instrument by its issuer and payments made by a third party who had borrowed the instrument was already relevant even before the JGTRRA for exempt interest dividends, capital gain dividends, distributions treated as a return of capital, foreign tax credit dividends, and dividends eligible for the dividends received deduction, but was generally not relevant for dividends or in lieu of dividend payments received by an individual. See section 1.6045–2(a), (f)). In addition, the Conference Report states:

In the case of brokers and dealers who engage in securities lending transactions, short sales, or other similar transactions on behalf of their customers in the normal course of their trade or business, the conferees intend that the IRS will exercise its authority under section 6724(a) to waive penalties where dealers and brokers attempt in good faith to comply with the information reporting requirements under sections 6042 and 6045, but are unable to reasonably comply because of the period necessary to conform their information reporting systems to the retroactive rate reductions on qualified dividends provided by the conference agreement. In addition, the conferees expect that individual taxpayers who receive payments in lieu of dividends from these transactions may treat the payments as dividend income to the extent that the payments are reported to them as dividend income on their Forms 1099–DIV received for calendar year 2003, unless they know or have reason to know that the payments are in fact payments in lieu of dividends rather than actual dividends. The conferees expect that the Treasury Department will issue guidance as rapidly as possible on information reporting with respect to payments in lieu of dividends made to individuals. H.R. CONF. REP. NO. 108–126, 108 ^th

Cong., 1 ^st Sess. 42–43 (2003).