(a) In general. Except as provided in paragraphs (b) and (c) of this section, 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 (as defined in section 989) of a taxpayer if—
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(1) The taxpayer's residence, determined under section 988(a)(3)(B)(i), is the United States;
(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. Qualified fails charge income that arises from a transaction any income from which is (or would be if the transaction produced income) effectively connected with a United States trade or business pursuant to § 1.864-4(c) is treated as from sources within the United States, and the income from the qualified fails charge is treated as effectively connected to the conduct of a United States trade or business.
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(d) Qualified fails charge. For purposes of this section, a qualified fails charge is a payment that—
(1) Compensates a party to a transaction that provides for delivery of a designated security (as defined in paragraph (e) of this section) in exchange for the payment of cash (delivery-versus-payment settlement) for another party's failure to deliver the specified designated security on the settlement date specified in the relevant agreement; and
(2) Is made pursuant to—
(e) Designated security. For purposes of this section, a designated security means any—
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(i) Debt instrument (as defined in § 1.1275-1(d)) issued by the United States Treasury Department, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or any Federal Home Loan Bank; or
(ii) Pass-through mortgage-backed security guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association.
(g) Effective/applicability date. This section is effective on February 21, 2012. This section applies to a qualified fails charge paid or accrued on or after December 8, 2010.
[T.D. 9579, 77 FR 9847, Feb. 21, 2012]