1.863-10T—Source of income from a qualified fails charge (temporary).
(a) In general.
Unless paragraph (b) or (c) of this section applies, the source of income from a qualified fails charge shall be determined by reference to the residence of the taxpayer as determined under section 988(a)(3)(B)(i).
(b) Qualified business unit exception.
The source of income from a qualified fails charge shall be determined by reference to the residence of a qualified business unit of a taxpayer if—
(2)
The qualified business unit's residence, determined under section 988(a)(3)(B)(ii), is outside the United States;
(3)
The qualified business unit is engaged in the conduct of a trade or business in the country where it is a resident; and
(4)
The transaction to which the qualified fails charge relates is attributable to the qualified business unit. A transaction will be treated as attributable to a qualified business unit if it satisfies the principles of § 1.864-4(c)(5)(iii) (substituting “qualified business unit” for “U.S. office”).
(c) Effectively connected income exception.
Income from a qualified fails charge that arises from a transaction that under the principles described in § 1.864-4(c) is effectively connected with a United States trade or business shall be sourced in the United States and the income from the qualified fails charge shall be treated as effectively connected to the conduct of a United States trade or business to the same extent as the transaction from which it arises.
(d) Definitions—
(1) Qualified fails charge.
For purposes of this section, a qualified fails charge is a payment that
(i)
Compensates a party to a transaction that provides for delivery of a Treasury security in exchange for the payment of cash (delivery-versus-payment settlement) for another party's failure to deliver the specified Treasury security on the settlement date specified in the relevant agreement; and
(A)
A trading practice or similar guidance approved or adopted by either an agency of the United States government or the Treasury Market Practices Group, or
(B)
Any trading practice, program, policy or procedure approved by the Commissioner in guidance published in the Internal Revenue Bulletin.
(2) Treasury security.
For purposes of this section, a Treasury security is any bill, note, or other evidence of indebtedness issued by the United States Treasury Department.
(e) Effective/applicability date.
This section applies to qualified fails charges paid or accrued on or after December 8, 2010.