SECTION 3. WAIVER OF PENALTIES

UNDER SECTION 6724(a)

Section 6721 imposes a penalty if a payor fails to file correct information returns with the Service, including returns required under section 6042 (relating to payment of dividends) and section 6045 (relating to returns of brokers). Section 6722 imposes a penalty if a payor fails to furnish correct information statements to payees, including statements required under sections 6042 and 6045. Section 6724(a) authorizes the Service to waive the section 6721 and 6722 penalties if the failure to comply is due to reasonable cause and not to willful neglect.

If they have not already done so, brokers as defined in section 6045 who engage in securities lending transactions, short sales, or other similar transactions

2003-40 I.R.B. 752 October 6, 2003

first), the broker must allocate the transferred shares between pools of loanable shares.

.01 Loanable Shares Defined

The amendments to section 1.6045–2 are expected to clarify the present rule that loanable shares do not include shares that the broker by law is prevented from lending. Thus, loanable shares do not include shares that the broker has not been given permission to borrow or lend, shares that the owner may not transfer (such as restricted stock), and shares that, although held in a margin account, may not be borrowed because of Securities and Exchange Commission restrictions on the value of the shares that may be borrowed from the account.

The Service also expects to amend the existing regulations to provide new rules regarding shares that are to be treated as loanable shares. When amended, the regulations are expected to permit brokers to exclude from loanable shares one or more of the following categories of shares:

1. All shares held for the broker’s own account.

2. All shares that would not be loanable but for the fact that they are held in a margin account pursuant to account documentation authorizing the lending of shares.

3. Shares that the owner has requested the broker not to lend (even if the owner had executed a written authorization to lend), provided that, consistent with an established practice reflected in the broker’s books and records, the broker complies with the request.

4. Shares which had been loaned, but, with respect to which the owner exercised a right under the lending agreement to call back the shares within a fixed period.

5. Any other category of shares described in guidance issued by the Service. The regulations are expected to provide that, under the preceding paragraph, shares in any of these five categories may

on behalf of their customers in the normal course of the brokers’ trade or business should immediately undertake action to conform their information reporting systems to the JGTRRA. The Service expects brokers to complete those efforts as soon as reasonably possible for the calendar year 2003 and, to the extent reasonably possible, to comply with their reporting responsibilities in a manner consistent with the JGTRRA for payments in lieu of dividends for the calendar year 2003.

The Service will exercise its authority under section 6724(a) to waive penalties if a broker shows that it made a good faith attempt to comply with the information reporting requirements under sections 6042 and 6045 in a manner consistent with the JGTRRA for dividend payments made during calendar year 2003 but could not reasonably do so because the broker had inadequate time within which to conform the broker’s information reporting systems to the JGTRRA. The Service will consider all relevant facts and circumstances in determining whether a broker acted in good faith in attempting to comply with the information reporting requirements for dividend payments made during calendar year 2003. For dividend payments made during calendar year 2004, however, except in extraordinary circumstances, the Service will consider brokers to have had adequate time to conform their information reporting systems to the new law for payments in lieu of dividends.