[Federal Register Volume 60, Number 84 (Tuesday, May 2, 1995)]
[Proposed Rules]
[Pages 21482-21484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10755]



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DEPARTMENT OF THE TREASURY
26 CFR Part 1

[FI-21-95]
RIN 1545-AT46


Definition of Personal Property for Purposes of the Straddle 
Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
definition of personal property for purposes of the straddle rules. 
This action is necessary to reflect changes in the law made by the Tax 
Reform Act of 1984. The regulations provide guidance to persons who 
enter into straddle transactions.

DATES: Written comments must be received by July 31, 1995. Requests to 
appear and outlines of topics to be discussed at the public hearing 
scheduled for August 30, 1995, must be submitted by August 9, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (FI-21-95), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (FI-21-95), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. A public hearing has been scheduled for Wednesday, 
August 30, 1995, at 10 a.m. in the Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Robert B. 
Williams, (202) 622-3960; concerning submissions and the hearing, 
Michael Slaughter, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 1092(d) of the Internal Revenue Code provides definitions 
and special rules relating to straddles. Under section 
1092(d)(3)(B)(i)(II), an ownership interest in stock, which generally 
is not treated as personal property subject to the straddle rules, may 
be personal property if it is part of a straddle at least one of the 
offsetting positions of which is, under regulations, a position with 
respect to substantially similar or related property (other than 
stock). On March 20, 1995, the IRS published final regulations 
(Sec. 1.1092(d)-2) under section 1092(d)(3)(B). Those regulations 
generally apply the rules of Sec. 1.246-5 to determine whether an 
offsetting position is a position with respect to substantially similar 
or related property (other than stock) within the meaning of section 
1092(d)(3)(B)(i)(II).

Explanation of Provisions

    The proposed regulations clarify the definition of the term 
``personal property'' under section 1092(d)(1) as it applies to stock. 
The proposed [[Page 21483]] regulations provide that personal property 
includes any stock of a type that is actively traded and that is part 
of a straddle at least one of the offsetting positions of which is a 
position with respect to substantially similar or related property 
(other than stock). For this purpose, a position with respect to 
substantially similar or related property (other than stock) does not 
include direct ownership of stock or a short sale of stock but includes 
any other position with respect to substantially similar or related 
property. These proposed regulations thus clarify that, for example, 
stock and an equity swap with respect to property that is substantially 
similar or related to that stock can constitute a straddle for purposes 
of section 1092.
    The proposed regulations also address the scope of section 
1092(d)(3)(B)(i), which provides that stock that is offset by an option 
with respect to that stock or substantially identical stock or by a 
position with respect to substantially similar or related property 
(other than stock) is treated as personal property under section 
1092(d)(3)(B). Although this provision does not contain an explicit 
active trading requirement, the legislative history of the Tax Reform 
Act of 1984 indicates that Congress contemplated that the stock would 
be treated as personal property under this test only if it is of a type 
that is actively traded. H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 
907 (1984). The regulations, therefore, include this requirement. In 
contrast, the regulations clarify that, for purposes of section 
1092(d)(3)(B)(ii), if a corporation is formed or availed of to take 
positions in personal property that offset positions taken by any 
shareholder, stock of the corporation may be treated as personal 
property under section 1092(d)(3)(B) even if it is not actively traded.
    The proposed regulations generally are effective for positions 
established on or after May 1, 1995. The IRS believes, however, that 
the regulations merely clarify the rule that applied once 
Sec. 1.1092(d)-2 was promulgated. There is no implication that the 
results reached under these proposed regulations would not also be 
reached for positions established on or after March 17, 1995, and 
before May 1, 1995.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It also has been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for Wednesday, August 30, 1995, 
at 10 a.m. The public hearing will be held in the IRS Auditorium, 7th 
Floor, 1111 Constitution Avenue, NW., Washington DC 20224. Because of 
access restrictions, visitors will not be admitted beyond the Internal 
Revenue Building lobby more than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments by July 31, 1995 and submit an outline of the 
topics to be discussed and the time to be devoted to each topic (signed 
original and eight (8) copies) by August 9, 1995.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

    Drafting Information: The principal author of these regulations 
is Robert B. Williams, Office of Assistant Chief Counsel (Financial 
Institutions and Products). However, other personnel from the IRS 
and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *.

    Par. 2. Section 1.1092(d)-2 is revised to read as follows:


Sec. 1.1092(d)-2  Personal property.

    (a) Special rules for stock. As defined by section 1092(d)(1), 
personal property includes--
    (1) Any stock if the stock is of a type that is actively traded and 
the stock is part of a straddle at least one of the offsetting 
positions of which is--
    (i) An option with respect to that stock or substantially identical 
stock or securities; or
    (ii) Under paragraphs (b) and (c) of this section, a position with 
respect to substantially similar or related property (other than 
stock); and
    (2) Any stock, whether or not of a type that is actively traded, of 
a corporation formed or availed of to take positions in personal 
property as defined by section 1092(d)(1) that offset positions taken, 
directly or indirectly, by any shareholder.
    (b) Substantially similar or related property. For purposes of 
section 1092(d)(3)(B)(i)(II) and this section, the term substantially 
similar or related property is defined in Sec. 1.246-5 (other than 
Sec. 1.246-5(b)(3)). The rule in Sec. 1.246-5(c)(6) does not narrow the 
related party rule in section 1092(d)(4).
    (c) Position with respect to substantially similar or related 
property (other than stock). For purposes of section 
1092(d)(3)(B)(i)(II) and this section, a position with respect to 
substantially similar or related property (other than stock) does not 
include direct ownership of stock or a short sale of stock but includes 
any other position with respect to substantially similar or related 
property.

    (d) Example. The following example illustrates the application 
of this section.
    (1) Facts--(i) The stock. A acquired 10,000 shares of actively 
traded X stock during 1990. On September 29, 1995, those shares had 
a fair market value of $1,000,000.
    (ii) The swap. On September 29, 1995, A entered into an ``equity 
swap'' contract with unrelated counterparty C, for a term of three 
years. Under the terms of that contract, on the last business day of 
each calendar quarter, A must pay to C an amount equal to the 
appreciation, if any, during the quarter on 10,000 shares of X 
stock. A also must pay to C an amount equal to the dividends, if 
any, that were paid during the quarter on 10,000 shares of X stock. 
On the last business day of each calendar quarter, A is to receive 
from C an amount equal to the depreciation, if any, during the 
quarter on 10,000 shares of X stock. A also is to receive from C an 
amount equal to the 3-month London Interbank Offered Rate (LIBOR), 
as determined at the close of the prior quarter, multiplied by the 
value of the X stock on that date.
    (2) Holdings--(i) The two legs as offsetting positions. Because 
holding the equity swap [[Page 21484]] substantially diminishes A's 
risk of loss from holding the X stock, the X stock and the equity 
swap are offsetting positions within the meaning of section 1092(c). 
The remaining question is whether these are positions with respect 
to personal property.
    (ii) The swap leg as a position with respect to personal 
property. The equity swap contract is a position with respect to 
personal property as defined by section 1092(d)(1). Although section 
1092(d)(3)(A) generally excludes stock from the definition of 
personal property, this exclusion does not apply to interests in 
stock. Therefore, stock can be personal property when testing 
whether an interest in the stock, other than a direct interest in, 
or a short sale of, the stock, is a position with respect to 
personal property. Because the equity swap contract is an interest 
in actively traded stock, the equity swap contract is a position 
with respect to personal property.
    (iii) The stock leg as personal property. As described below, 
ownership of the X stock is also a position with respect to personal 
property.
    (A) The rule of section 1092(d)(3)(B)(i)(II). Under section 
1092(d)(3)(B)(i)(II) and paragraph (a)(1)(ii) of this section, stock 
is not excluded from the definition of personal property if it is 
part of a straddle at least one of the offsetting positions of which 
is a position with respect to substantially similar or related 
property (other than stock).
    (B) The swap as a position with respect to substantially similar 
or related property (other than stock) for purposes of section 
1092(d)(3)(B)(i)(II). Under paragraph (b) of this section, the 
equity swap contract is a position with respect to property that is 
substantially similar or related to the X stock because A is 
entitled to payments under the equity swap contract that are 
attributable to the decline in the value of the X stock. See 
Sec. 1.246-5(c)(7). Under section 1092(d)(3)(B)(i)(II) and paragraph 
(c) of this section, the equity swap contract is a position with 
respect to substantially similar or related property (other than 
stock) because it is not direct ownership of stock or a short sale 
of stock.
    (C) The stock as part of a straddle for purposes of the test of 
section 1092(d)(3)(B)(i)(II). In determining whether the X stock is 
part of a straddle for purposes of the test of section 
1092(d)(3)(B)(i) and paragraph (a)(1) of this section, section 
1092(d)(3)(C) treats the X stock as personal property. Because the 
stock is treated as personal property for this purpose, because the 
equity swap contract is a position with respect to personal property 
(see paragraph (d)(2)(ii) of this section), and because the X stock 
and the equity swap contract are offsetting positions (see paragraph 
(d)(2)(i) of this section), the straddle test in section 
1092(d)(3)(B)(i) and paragraph (a)(1) of this section is satisfied. 
Accordingly, under section 1092(d)(3)(B), the stock is personal 
property for all purposes of section 1092.
    (iv) The two legs as a straddle. Because ownership of the X 
stock and the equity swap contract are offsetting positions with 
respect to personal property, the X stock and the equity swap 
contract are a straddle to A within the meaning of section 
1092(c)(1).

    (e) Effective dates--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to positions 
established on or after May 1, 1995.
    (2) Special rules for substantially similar or related property--
(i) In general. Paragraph (b) of this section applies to positions 
established on or after March 17, 1995.
    (ii) Special rule for certain straddles. Paragraph (b) of this 
section applies to positions established after March 1, 1984, if the 
taxpayer substantially diminished its risk of loss by holding 
substantially similar or related property involving the following types 
of transactions--
    (A) Holding offsetting positions consisting of stock and a 
convertible debenture of the same corporation where the price movements 
of the two positions are related; or
    (B) Holding a short position in a stock index regulated futures 
contract (or alternatively an option on such a regulated futures 
contract or an option on the stock index) and stock in an investment 
company whose principal holdings mimic the performance of the stocks 
included in the stock index (or alternatively a portfolio of stocks 
whose performance mimics the performance of the stocks included in the 
stock index).
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-10755 Filed 5-1-95; 8:45 am]
BILLING CODE 4830-01-U