7587. When will direct ownership of stock be subject to the tax straddle rules?Nuco Employeercline202014-06-27T18:35:00Z2014-06-27T18:35:00Z37494273Case Western Reserve University3510501214Site Map/Investments/StraddlesTaxFactsDefaultArticle2006-01-04T00:00:00Z121091078-00-tf2.xml1078.00;#1842;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2When will direct ownership of stock be subject to the tax straddle rules? What is a “qualified covered call option”?
26000.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:36:43Z7587. When will direct ownership of stock be subject to the tax straddle rules? Direct ownership of stock (i.e., ownership of the stock certificates) is considered to be ownership of personal property for purposes of the tax straddle rules if such stock is of a type that is actively traded and at least one of the positions offsetting such stock is a position with respect to such stock or substantially similar or related property.IRC Sec. 1092(d)(3)(A). (This limited definition does not apply for purposes of determining whether a straddle constitutes a conversion transaction (See Q 7603 and Q 7604).IRC Secs. 1258(c)(2)(B), 1258(d)(1).In the American Jobs Creation Act of 2004, Congress repealed the pre-existing exclusion from the tax straddle rules for most direct ownership of stock. The statutory rule expands on previously proposed regulations that limited the scope of the statutory exclusion. Under the proposed regulations, personal property included any stock that is actively traded and that is part of a straddle in which at least one of the offsetting positions is a position with respect to substantially similar or related property other than stock. A position with respect to substantially similar or related property other than stock did not include direct ownership of stock or a short sale of stock, but included any other position with respect to substantially similar or related property. Thus, under the proposed regulations, stock and an equity swap with respect to property that is substantially similar or related to that stock could constitute a straddle for purposes of IRC Section 1092.Prop. Treas. Reg. §1.1092(d)-2.The IRS has not yet issued any guidance on the rules, but the 2004 change eliminated the ability to hold offsetting positions in a target and an acquiring corporation’s stock without being subject to the tax straddle rules, including termination of holding periods.Stock in a corporation that was formed or availed of to take positions in personal property that offset positions taken by shareholders of such corporation will also be subject to the straddle rules regardless of whether the stock is actively traded.IRC Sec. 1092(d)(3)(B)(ii); Prop. Treas. Reg. §1.1092(d)-2(a)(2).Stock that is part of a straddle at least one of the offsetting positions of which is a securities futures contract (see Q 7579) with respect to the stock or substantially identical stock will be subject to the straddle rules.H.R. Conf. Rep. No. 106-1033 (CRTRA 2000). See IRC Sec. 1092(d)(3)(B)(i)(II). The regulations under IRC Section 1092(b), applying the principles of IRC Section 1233(b) and IRC Section 1233(d) (regarding the determination of short-term and long-term losses) to positions in a straddle, will also apply (see Q 7592).H.R. Conf. Rep. No. 106-1033 (CRTRA 2000). These rules are demonstrated in the following example from H.R. Conf. Rep. No. 106-1033 (CRTRA 2000):Example: Assume a taxpayer holds a long-term position in actively traded stock (that is a capital asset in the taxpayer’s hands) and enters into a securities futures contract to sell substantially identical stock (at a time when the position in the stock has not appreciated in value so that the constructive sale rules of IRC Section 1259 do not apply). The taxpayer has a straddle. Any loss on closing the securities futures contract will be a long-term capital loss.The IRS has determined that investment “units” consisting of stock and a future payment right (that varied inversely with the value of the stock and that was found to be a “cash settlement put option”) constituted a straddle when the positions were held simultaneously.Rev. Rul. 88-31, 1988-1 CB 302. The Service has also privately ruled that two positions consisting of (1) a put option that was part of a “costless collar” (i.e., the purchase of a cash-settlement put option and the sale of a cash-settlement call option), and (2) shares of the underlying stock, constituted a straddle under IRC Section 1092(c). Similarly, the call option, which was part of the same costless collar, and the shares of the underlying stock also constituted a straddle.Let. Rul. 199925044. See also FSA 200150012 (a straddle existed where the corporate taxpayer directly owned shares of a company (i.e., the long position) and had also issued purported debt instruments in which the value of the instruments was linked to the price of the underlying stock).The tax treatment of a straddle that includes a position (or positions) in stock depends on the overall make-up of the straddle and whether the straddle constitutes a conversion transaction. For details, see Q 7592, Q 7603, and Q 7604.