Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Proposed Rules 4751

constitute a straddle. See section 1092(c)(1),

(c)(3)(A)(i). When issued, the debt instrument

is a position in personal property that is part

of a straddle. See § 1.1092(d)–1(d).

Consequently, D’s interest payments are

interest and carrying charges properly

allocable to personal property that is part of

a straddle and must be allocated to the

capital account for the forward contract for

the delivery of x barrels of fuel oil to E. See

§§ 1.263(g)–3(b)(1), (b)(3), (c)(3), and (d)(1)

and -4(a)(1)(iii).

Example 4. Financial instrument issued to

carry personal property that is part of a

straddle. (i) Facts. The facts are the same as

for Example 3 except that D also enters into

a two-year interest rate swap under which D

receives LIBOR times a notional principal

amount equal to $z and pays 7% times $z.

(ii) Analysis. Because of the relationship

between the two-year debt instrument issued

by D and the interest rate swap, the interest

rate swap is a financial instrument that

carries personal property that is part of a

straddle. See § 1.263(g)–3(d)(4). Net

payments made by D under the interest rate

swap are chargeable to the capital account for

the forward contract for the delivery of x

barrels of fuel oil to E. Similarly, net

payments received by D under the interest

rate swap are allowable offsets. See

§ 1.263(g)–3(e)(5).

Example 5. Contingent payment debt

instrument with embedded short position.

(i) Facts. On January 1, 1998, G purchases

100,000 shares of the common stock of XYZ

corporation (which is publicly traded). On

January 1, 2002, the 100,000 shares of XYZ

corporation common stock were worth $x per

share. On that date, G issued a contingent

payment debt instrument for $100,000x. The

terms of the debt instrument provided that

the holder would receive an annual payment

of $2,000x on December 31 of each year up

to and including the maturity date of

December 31, 2007. On the maturity date, the

holders would also receive a payment of

$100,000x plus an additional amount, if the

price of an XYZ share exceeded $1.2x on

such date, equal to 100,000 times threequarters of the amount of such excess per

share. Thus, G’s aggregate payments on the

debt instrument varied directly with the

increase in value in the XYZ shares.

(ii) Analysis. The debt instrument is a

position in XYZ stock. See § 1.1092(d)–1(d).

The XYZ stock is personal property within

the meaning of section 1092(d)(3)(B) because

the debt instrument 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). See § 1.1092(d)–

2(c). The debt instrument and the XYZ shares

are offsetting positions with respect to the

same personal property and constitute a

straddle. See sections 1092(c)(1), (c)(3)(A)(i).

Consequently, G’s interest payments are

interest and carrying charges properly

allocable to personal property that is part of

a straddle, see §§ 1.263(g)–3(b)(1), (b)(3),

(c)(3), and (d)(1), and must be allocated to the

capital account for the XYZ common stock,

see § 1.263(g)–4(a)(1)(iii) and (a)(3).

Example 6. Straddle including partnership

interest.

(i) Facts. H borrows money from I to

purchase 100 ounces of gold at a cost of $u.

H transfers the 100 ounces of gold and $v to

a newly created trust that issues multiple

classes of trust certificates and is treated as

a partnership for tax purposes. In return, H

receives two trust certificates. One certificate

entitles the holder to a payment on

termination of the trust at the end of four

years equal to the value of the 100 ounces of

gold up to a maximum value of $(u + w). The

other certificate entitles the holder to a

payment equal to the amount by which the

value of 100 ounces of gold exceeds $(u + w)

on termination of the trust. H sells the second

certificate and keeps the first certificate. H

also enters into a forward contract to sell 100

ounces of gold for $1.12u per ounce on a date

two years after creation of the trust. The trust

uses part of the $v and similar cash

contributions from other investors to pay

costs of storing the gold held by the trust and

allocates H’s share of the expenses to H.

(ii) Analysis. The trust certificate retained

by H and the forward contract entered into

by H are personal property for the purposes

of section 263(g). See § 1.263(g)–2(a). They

are also offsetting positions and constitute a

straddle. Section 1092(c)(1). The borrowing

from I is an indebtedness incurred to

purchase personal property that is part of a

straddle. See §§ 1.263(g)–3(b)(1) and (c)(1).

Similarly, the gold storage expenses are

expenses incurred due to the taxpayer’s

holding personal property that is part of a

straddle. See § 1.263(g)–3(b)(2). Therefore

both the interest on the borrowing and the

gold storage expenses must be allocated to

the capital account for the partnership

interest represented by the retained trust

certificate. See § 1.263(g)–4(a)(1)(i) and (a)(2).

Example 7. Equity Swap.

(i) Facts. On January 1, 1998, J purchases

100,000 shares of the common stock of XYZ

corporation (which is publicly traded). On

December 31, 2001, the 100,000 shares of

XYZ corporation common stock were worth

$x per share. On that date, J entered into a

NPC with K. The terms of the NPC provided

that K would receive an annual payment on

December 31 of each year equal to 100,000

times any appreciation in the value of a share

of XYZ corporation stock above its price at

the end of trading on December 31 of the

preceding year and 100,000 times the

dividends paid during the year on each share

of XYZ corporation stock. In return, on

December 31 of each year, J would receive an

amount equal to LIBOR times the value of

100,000 XYZ shares at the end of trading on

December 31 of the preceding year plus

100,000 times the amount of any decrease in

the value of a share of XYZ corporation stock

below its price at the end of trading on

December 31 of the preceding year. Payments

between J and K would be netted and

continue up to and including the maturity

date of the NPC on December 31, 2008. Thus,

J’s aggregate payments on the NPC varied

directly with the increase in value in the

XYZ shares.

(ii) Analysis. The NPC is a position in XYZ

stock. See § 1.1092(d)–2(c). The XYZ stock is

personal property within the meaning of

section 1092(d)(3)(B) because the NPC is a

position with respect to substantially similar

or related property (other than stock) within

the meaning of section 1092(b)(3)(B)(i)(II).

See § 1.1092(d)–2(a)(1)(ii). The NPC and the

XYZ shares are offsetting positions with

respect to the same personal property and

constitute a straddle. See sections 1092(c)(1),

(c)(3)(A)(i). Consequently, J’s payments are

interest and carrying charges properly

allocable to personal property that is part of

a straddle. See §§ 1.263(g)–3(b)(3) and (d)(1).

Therefore, they should be allocated to the

personal property that is part of the straddle

in the manner that is most appropriate under

all the facts and circumstances. In this case,

because these payments are incurred to carry

the XYZ shares, they should be allocated to

the capital account for the XYZ common

stock. See § 1.263(g)–4(a)(3).

§ 1.263(g)–5 Effective dates.

Sections 1.263(g)–1, 1.263(g)–2,

1.263(g)–3, and 1.263(g)–4 apply to

interest and carrying charges properly

allocable to personal property that are

paid, incurred, or accrued after the date

these regulations are adopted as final

regulations by publication in the

Federal Register for a straddle

established on or after January 17, 2001.

Par. 3. Section 1.1092(d)–1 is

amended by revising paragraph (d) and

adding paragraph (e), to read as follows:

§ 1.1092(d)–1 Definitions and special rules.

* * * * *

(d) Debt instrument linked to the

value of personal property. If a taxpayer

is the obligor under a debt instrument

one or more payments on which are

linked to the value of personal property

or a position with respect to personal

property, then the taxpayer’s obligation

under the debt instrument is a position

with respect to personal property and

may be part of a straddle.

(e) Effective dates. Paragraph

(b)(1)(vii) of this section applies to

positions entered into on or after

October 14, 1993. Paragraph (c) of this

section applies to positions entered into

on or after July 8, 1991. Paragraph (d)

of this section is effective for straddles

established on or after January 17, 2001.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 01–1240 Filed 1–17–01; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–115560–99]

RIN 1545–AX66

Equity Options With Flexible Terms;

Qualified Covered Call Treatment

AGENCY: Internal Revenue Service (IRS),

Treasury.

4752 Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Proposed Rules

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations providing

guidance on the application of the rules

governing qualified covered calls. The

new rules address concerns that were

created by the introduction of new

financial instruments several years after

the enactment of the qualified covered

call rules. The proposed regulations

would provide guidance to taxpayers

writing equity call options. This

document also provides notice of public

hearing on these proposed regulations.

DATES: Written and electronic comments

and requests to appear and outlines of

topics to be discussed at the public

hearing scheduled for May 9, 2001, at 10

a.m., must be submitted by April 18,

2001.

ADDRESSES: Send submissions to:

CC:M&SP:RU (REG–115560–99), room

5226, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. Submissions may be hand

delivered between the hours of 8 a.m.

and 5 p.m. to: CC:M&SP:RU (REG–

115560–99), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Avenue NW., Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option of

the IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.gov/tax_regs/

regslist.html. The public hearing will be

held in the IRS Auditorium, Internal

Revenue Building, 1111 Constitution

Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Pamela

Lew, (202) 622–3950; concerning

submissions and the hearing, Guy

Traynor, (202) 622–7180, (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

On June 25, 1998, the IRS published

in the Federal Register proposed

regulations (REG–104641–97, 63 FR

34616) addressing whether strike prices

available for equity options with flexible

terms affect the definition of a qualified

covered call (QCC) under section

1092(c)(4) for equity options with

standardized terms. No requests to

speak at a public hearing were received,

and no public hearing was held.

The proposed regulations provided

that strike prices available for equity

options with flexible terms do not affect

the bench marks used to determine

whether equity options with

standardized terms are eligible for QCC

treatment. That provision was adopted

as § 1.1092(c)–1 of the final regulations

(TD 8866), published in the Federal

Register for January 25, 2000 (65 FR

3812).

The regulatory text of REG–104641–

97 did not address whether an equity

option with flexible terms is itself

eligible for QCC treatment. The

preamble to the proposed regulations,

however, did request comments about

whether equity options with flexible

terms should be eligible for QCC

treatment and, if eligible, what bench

marks should apply. In light of the

comments received, consideration was

also given to the treatment of over-thecounter options and standardized

options with terms of more than one

year. After consideration of the written

comments, this NPRM proposes

regulations addressing the eligibility for

QCC treatment of equity options with

flexible terms, over-the-counter options

and standardized options with terms

longer than one year.

QCC Treatment

Section 1092(c) defines a straddle as

offsetting positions with respect to

personal property. Under section

1092(d)(3)(B)(i)(I), stock is personal

property if the stock is part of a straddle

that involves an option on that stock or

substantially identical stock or

securities. Under section 1092(c)(4),

however, writing a QCC option and

owning the optioned stock is not treated

as a straddle under section 1092 if

certain conditions are satisfied.

The legislative history of section 1092

indicates that QCCs were excepted from

the loss deferral rule for straddles

because ‘‘they are undertaken primarily

to enhance the taxpayer’s investment

return on the stock and not to reduce

the taxpayer’s risk of loss on the stock.’’

H.R. Rep. No. 432, 98th Cong., 2d Sess.

at 1266–68 (1983). To qualify as a QCC,

a covered call must, among other things,

be exchange traded and not be deep in

the money. An option is exchange

traded if the option is traded on a

national securities exchange that is

registered with the Securities and

Exchange Commission or on some other

market that the Secretary determines

has rules adequate to carry out the

purposes of the QCC provisions. An

option is deep in the money if the strike

price of the option is lower than the

lowest qualified bench mark for the

stock at the time the option is written.

Section 1092(c)(4)(H) grants the

Secretary of the Treasury the authority

to prescribe regulations to carry out the

purposes of the QCC exception,

including regulations modifying the

provisions of the exception as

appropriate to take account of changes

in the practices of options exchanges.

The introduction of exchange-traded

equity options with flexible terms is one

such change. Unlike equity options with

standardized terms, equity options with

flexible terms can have strike prices at

other than fixed intervals and have

other than standardized expiration

dates. Options exchanges have also

introduced standardized options with

longer terms.

In response to the request for

comments, two comments were

received. One commentator argued that

equity options with flexible terms

should not be eligible for QCC

treatment. This commentator noted that

in 1984, when section 1092(c)(4) was

enacted, only equity options with

standardized terms were traded on the

national exchanges and that it is likely

that Congress did not intend to include

customizable options within the

definition of a QCC. This commentator

also pointed out that equity options

with flexible terms were developed to

compete with over-the-counter (OTC)

options, which are not eligible for QCC

treatment. The commentator suggested

that excluding equity options with

flexible terms from QCC treatment

would avoid a competitive imbalance

from different tax treatment for

competing products.

The second commentator stated that,

as a matter of statutory analysis, equity

options with flexible terms are already

eligible for QCC treatment. This

commentator argued that QCC treatment

is appropriate if the taxpayer is using

the option to increase the yield on its

stock investment and not to reduce the

risk of loss on its stock. In support of

this point, the commentator noted that

nothing in the applicable legislative

history suggests that Congress intended

to limit the QCC option exception to

standardized options. Alternatively, this

commentator argued that because equity

options with flexible terms were

designed to compete with OTC options,

regulations should be promulgated

allowing OTC options to qualify for

QCC treatment on the same terms as

exchange-traded equity options with

flexible terms.

Explanation of Provisions

Equity Options With Flexible Terms and

Qualifying OTC Options

After consideration of the comments

received, the proposed regulations

provide that equity options with flexible

terms may be QCC options as long as

they satisfy the general rules for QCC

treatment described in section

1092(c)(4), are not for a term of longer

Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Proposed Rules 4753

than one year, and meet other specified

requirements. In addition, an equity

option with standardized terms must be

outstanding for the underlying equity.

For purposes of applying the general

rules, the bench marks will be the same

as those for an equity option with

standardized terms on the same stock

having the same applicable stock price.

The proposed regulations also provide

that certain OTC options may be QCC

options so that OTC options that are

economically similar to equity options

with flexible terms may enjoy the same

tax benefits as equity options with

flexible terms. Specifically, the

proposed regulations provide that an

OTC option is eligible for QCC

treatment if it is entered into with a

person registered with the Securities

and Exchange Commission as a brokerdealer or alternative trading system and

meets the same requirements for QCC

treatment that apply to equity options

with flexible terms.

QCC Status for Equity Options With

Standardized Terms

In the process of considering the

proper treatment for equity options with

flexible terms, the IRS examined QCC

status in general. At the time that

Congress enacted section 1092(c)(4),

options available on the national

securities exchanges had a term of nine

months or less. Congress did not

include in the legislative history any

guidance on the effect of the time value

of money upon the strike price.

Subsequent to the enactment of

section 1092(c)(4), the national

securities exchanges began offering

certain standardized options with

expiration dates that are 12 or more

months after the date entered into. The

longer term of these options may reduce

the taxpayer’s risk of loss on its stock

position because of the time period

involved.

Increased risk reduction through the

use of long term options applies equally

to equity options with flexible terms,

OTC options, and equity options with

standardized terms. The proposed

regulations therefore provide that a oneyear term limit also applies to equity

options with standardized terms.

Comments are requested on this issue,

including a discussion of time

limitations in general, as well as the

appropriateness of a one-year cutoff.

If QCC treatment should apply to

longer-term options, it may be

appropriate to change the deep-in-themoney standard to prevent the increase

in risk reduction. A comment

recommending a time limitation greater

than one year or recommending that

there be no time limitation should also

provide detailed, comprehensive

descriptions of possible solutions to the

problem of increased risk reduction.

Comments should also address the

administrability of any proposed

solutions.

Proposed Effective Date

These regulations would apply to

options entered into on or after 30 days

after the date that the Treasury decision

adopting these rules as final regulations

is published in the Federal Register.

Regulations concerning time

limitations for equity options with

standardized terms would be

prospective in nature and would apply

to transactions entered into on or after

90 days from the date of publication of

the final regulation promulgating such

rules.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

is hereby certified that these regulations

will not have a significant economic

impact on a substantial number of small

entities. This certification is based upon

the fact that these regulations do not

impose any recordkeeping or reporting

requirements and therefore impose

minimal compliance costs, if any, upon

any small entities that may be affected.

Because equity options with

standardized terms will not be eligible

for QCC treatment if such options have

a duration of more than 1 year, some

taxpayers may lose substantive tax

benefits. This certification is further

based upon the understanding that such

taxpayers will not include a substantial

number of small entities. Comments are

specifically requested on the question of

whether a substantial number of small

entities (as opposed to large entities or

individual investors) will suffer a

significant economic impact under these

regulations. Therefore, a Regulatory

Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) 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 or electronic comments (a

signed original and eight (8) copies, if

written) that are submitted timely (in

the manner described in the ADDRESSES

portion of this preamble) to the IRS. The

IRS and Treasury request comments on

the clarity of the proposed regulations

and how they may be made easier to

understand. All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for May 9, 2001, at 10 a.m., in the IRS

Auditorium, Internal Revenue Building,

1111 Constitution Avenue NW.,

Washington DC. Due to building

security procedures, visitors must enter

at the 10th Street entrance located

between Constitution and Pennsylvania

Avenues, NW. In addition, all visitors

must present photo identifications to

enter the building. Because of access

restrictions, visitors will not be

admitted beyond the immediate

entrance area more than 15 minutes

before the hearing starts. For

information about having your name

placed on the building access list to

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this

preamble.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing. Persons who wish

to present oral comments at the hearing

must submit written comments and an

outline of the topics to be discussed and

the time to be devoted to each topic

(signed original and eight (8) copies) by

April 18, 2001. 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 Pamela Lew, Office of

Associate 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 is amended by adding entries

in numerical order to read as follows:

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

4754 Federal Register / Vol. 66, No. 12 / Thursday, January 18, 2001 / Proposed Rules

Section 1.1092(c)–2 also issued under 26

U.S.C.1092(c)(4)(H).

Section 1.1092(c)–3 also issued under 26

U.S.C. 1092(c)(4)(H).* * *

Par. 2. Section 1.1092(c)–1 is

amended as follows:

1. Paragraphs (b) and (d)(1)(ii)

introductory text are revised.

2. Paragraphs (c) and (d)(3) are added.

3. Paragraph (e) is revised.

The revisions and addition read as

follows:

§ 1.1092(c)–1 Equity options with flexible

terms.

* * * * *

(b) No effect on lowest qualified bench

mark for standardized options. The

availability of strike prices for equity

options with flexible terms does not

affect the determination of the lowest

qualified bench mark, as defined in

section 1092(c)(4)(D), for an equity

option with standardized terms.

(c) Qualified covered call option

status—(1) Requirements. An equity

option with flexible terms is a qualified

covered call option only if—

(i) The option meets the requirements

of section 1092(c)(4)(B) (taking into

account paragraph (c)(2) of this section);

(ii) The only payments permitted with

respect to the option are a single fixed

premium paid not later than 5 business

days after the day on which the option

is granted, and a single fixed strike price

stated as a dollar amount that is payable

entirely at (or within 5 business days of)

exercise;

(iii) The option is granted not more

than 1 year before the day on which the

option expires; and

(iv) An equity option with

standardized terms is outstanding for

the underlying equity.

(2) Lowest qualified bench mark—(i)

In general. For purposes of determining

whether an equity option with flexible

terms is deep in the money within the

meaning of section 1092(c)(4)(C), the

lowest qualified bench mark under

section 1092(c)(4)(D) is the same for an

equity option with flexible terms as the

lowest qualified bench mark for an

equity option with standardized terms

on the same stock having the same

applicable stock price.

(ii) Example. The following example

illustrates the rules set out in paragraph

(c)(2)(i) of this section:

Example. Taxpayer owns stock in

Corporation X. Taxpayer writes an equity call

option with flexible terms on Corporation X

stock through a national securities exchange.

The applicable stock price for Corporation X

stock is $73.75. Using the bench marks for an

equity option with standardized terms with

an applicable stock price of $73.75, the

highest available bench mark less than the

applicable stock price is $70, and the second

highest bench mark is $65. Therefore, an

equity call option with flexible terms on

Corporation X with a term of 90 days or less

will not be deep in the money if the strike

price is not less than $70. If the term is

greater than 90 days, an equity call option

with flexible terms on Corporation X will not

be deep in the money if the strike price is not

less than $65.

(d) * * *

(1) * * *

(ii) That is traded on any national

securities exchange which is registered

with the Securities and Exchange

Commission (other than those described

in the SEC Releases set forth in

paragraph (d)(1)(i) of this section) and

is—

* * * * *

(3) Equity option with standardized

terms means an equity option that is

traded on a national securities exchange

registered with the Securities and

Exchange Commission and that is not an

equity option with flexible terms.

(e) Effective date—(1) In general.

Except as provided in paragraph (e)(2)

of this section, this section applies to

equity options with flexible terms

entered into on or after January 25,

2000.

(2) Special effective date for

paragraph (c). Paragraph (c) of this

section applies to equity options with

flexible terms entered into on or after 30

days after the date that the Treasury

decision adopting these regulations is

published in the Federal Register.

Par. 3. Section 1.1092(c)–2 is added to

read as follows:

§ 1.1092(c)–2 Equity options with

standardized terms.

(a) One-year limitation. An equity

option with standardized terms (as

defined in § 1.1092(c)–1(d)(3)) is a

qualified covered call only if—

(1) The option meets the requirements

of section 1092(c)(4)(B); and

(2) The option is granted not more

than 1 year before the day on which the

option expires.

(b) Effective date. This section applies

to equity options with standardized

terms entered into on or after 90 days

after the date that the Treasury decision

adopting these regulations is published

in the Federal Register.

Par. 4. Section 1.1092(c)–3 is added.

§ 1.1092(c)–3 Qualifying over-the-counter

options.

(a) In general. Under section

1092(c)(4)(B)(i), an equity option is not

a qualified covered call option unless it

is traded on a national securities

exchange which is registered with the

Securities and Exchange Commission or

other market which the Secretary

determines has rules adequate to carry

out the purposes of section 1092(c)(4).

In accordance with section

1092(c)(4)(H), this requirement is

modified as provided in paragraph (b) of

this section.

(b) Qualified covered call option

status. A qualifying over-the-counter

option is a qualified covered call option

if it meets the requirements of

§ 1.1092(c)–1(c) after substituting

‘‘qualifying over-the-counter option’’ for

‘‘equity option with flexible terms’’. For

the purposes of this paragraph (b), a

qualifying over the counter option is

deemed to satisfy the requirements of

section 1092(c)(4)(B)(i).

(c) Qualifying over-the-counter option.

For the purposes of this section,

qualifying over-the-counter option

means an equity option that—

(1) Is not traded on a national

securities exchange registered with the

Securities and Exchange Commission;

and

(2) Is entered into with a person

registered with the Securities and

Exchange Commission as—

(i) A broker-dealer under section 15 of

the Securities Act of 1934 and the

regulations thereunder; or

(ii) An alternative trading system

under 17 CFR 242.300 et seq.

(d) Effective date. This section applies

to qualifying over-the-counter options

entered into on or after 30 days after the

date that the Treasury decision adopting

these regulations is published in the

Federal Register.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 01–1294 Filed 1–17–01; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–114998–99]

RIN 1545–AY71

Obligations of States and Political

Subdivisions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Partial withdrawal of notice of

proposed rulemaking; notice of

proposed rulemaking by cross-reference

to temporary regulations; and notice of

public hearing.

SUMMARY: This document withdraws

portions of the notice of proposed

rulemaking published in the Federal

Register on January 22, 1998. In the