"Mortal or Venial? Section 871(m) and the Seven Deadly Sins of Equity Swaps"

In 2010, the equity branch of the swap industry was "cast out of Eden" with the passage of Section 871(m) of the Internal Revenue Code. Allegedly, foreign taxpayers had been feasting too long on the "forbidden fruit" of financial products that provide dividend equivalents tied to U.S. equities without the corresponding withholding on U.S.-source income. Since then, taxpayers have wandered in a regulatory wilderness, with only temporary regulations to guide them. The Internal Revenue Service has proposed new regulations to bolster and replace the temporary regulations.

This Stroock Special Bulletin examines the proposed regulations, which provide investors with a perilous path out of perdition.