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83-10 The Tax Equity and Fiscal Responsibility Act of 1982

TO: All NASD Members

ATTENTION: Officers, Partners, and Proprietors

BACKGROUND

On September 3, 1982, President Reagan signed into law the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA" or the "Act"). The purpose of the law was to raise nearly $100 billion in additional federal revenues through targeted tax increases and reform measures designed to improve taxpayer compliance.

It is anticipated that the new requirements prescribed by the Act and the attendant regulations being developed by the Internal Revenue Service will have a significant impact on the broker-dealer community. Because of this, it is essential that members become thoroughly familiar with the law and the accompanying regulations so that planning for the most cost-effective means for compliance can begin.

Although pressure is building to repeal certain aspects of the Act, there can be no assurance that any statutory changes will result. The IRS regulations are, however, simply proposals at this time and are not scheduled to become effective until July 1, 1983. It is hoped that recent appearances at public hearings by the NASD and other organizations have served to lessen some of the administrative burdens that may otherwise have developed. The NASD will continue to monitor all developments in this area and will alert members to changes in the law and the proposed regulations when, as and if they should occur.

The key provisions of the Act as they relate to the securities industry are as follows:

  • a 10% withholding on dividends and interest including Original Issue Discount, i.e., debt obligations issued at a discount from par value;
  • the reporting of interest and Original Issue Discount;
  • the reporting on a transactional basis of the gross proceeds of customers' transactions; and,
  • the registration of debt obligations.

A summary of each of these provisions of the TEFRA legislation, coupled with a discussion of the regulations that have been proposed to implement it, appears below.

WITHHOLDING ON INTEREST AND DIVIDENDS

For TEFRA purposes, all interest is subject to withholding including Original Issue Discount except:

  • interest on an individual's debt;
  • interest which is otherwise not subject to taxation;
  • interest on All-Savers certificates;
  • interest paid to nonresident alien individuals or a foreign corporation either already subject to withholding tax or exempted by a U.S. treaty;
  • interest from a foreign source paid outside the United States by U.S. corporations;

Regarding dividends, the withholding rate is similarly applied to any dividend distribution made by a corporation to its shareholders that is not a return of capital or a capital gain dividend. This includes "short dividends" and most monies reinvested in a dividend reinvestment plan, except for dividend reinvestment plans of qualified public utilities.

A withholding rate of 10 percent must be applied to interest and dividends paid after June 30, 1983. The tax must be withheld when the interest or dividends are actually paid or credited to the account of a non-exempt payee. Generally this would place the primary liability to withhold on those who make the payment of the interest or dividend (i.e., the issuer). However, broker-dealers who act as intermediaries between such payors and their customers (e.g., they hold securities in safekeeping for customer accounts) will be obliged to effect the 10% withholding when they are paid or credited to a non-exempt customer's account.

The Act provides that regulations relating to the deposit of withheld taxes take into account the costs of implementing a withholding system. Therefore, the proposed regulations provide that for a one-year period — July 1, 1983 to June 30, 1984 — a payor may have use of the withheld funds for approximately 30 days before depositing them with an authorized financial institution or Federal Reserve Bank. The regulations provide for an extension of this time period through June 1986, depending on the size of the financial institution. At the moment, however, a "broker-dealer" is not included within the definition of this term in the proposed 415 which are registered on Form S-3. The earlier exemption was available to "shelf offerings of large, closely-followed issuers when their securities were distributed through transactions in which broker/dealer compensation was limited by competitive market forces. The Association has concluded that these conditions are generally present in offerings which are made pursuant to Rule 415 and registered on Form S-3. Therefore, the Association has determined that all offerings made pursuant to Rule 415 and registered on Form S-3 are exempt from the filing requirements of the Corporate Financing Interpretation. Those offerings, however, remain subject to the substantive requirements of the Corporate Financing Interpretation. In addition, any offering which comes within the provisions of Schedule E to the Association's By-Laws (NASD Manual (CCH) Para. 1402) is required to be filed with the Association unless exempt from the Schedule E filing requirements.

* * * *

Any questions concerning this Notice may be directed to Dennis C. Hensley or Suzanne E. Rothwell of the Corporate Financing Department at (202) 728-8258.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance


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