14636 Federal Register / Vol. 60, No. 53 / Monday, March 20, 1995 / Rules and Regulations

SUMMARY: The final rule published on

December 19, 1994, is being further

amended to correct technical errors and

to conform the rule text and an

Appendix. Previously, on January 10,

1995, the Department published a

substitute page correcting Appendix

MS–1 to Part 3500 and correcting a

cross-reference. The corrections

published today are necessary to clarify

certain other provisions.

EFFECTIVE DATE: June 19, 1995. This is

the same effective date as applies to the

final rule and earlier corrections.

However, the Department continues to

encourage persons covered by the new

rule to implement all of its provision

earlier than the rule’s effective date.

FOR FURTHER INFORMATION CONTACT:

David R. Williamson, Director, RESPA

Enforcement, Room 5239, Department of

Housing and Urban Development, 451

7th Street, S.W., Washington, D.C.

20410, telephone (202) 708–4560. The

TDD number for hearing-impaired

persons is (202) 708–4594. (These are

not toll-free numbers.)

SUPPLEMENTARY INFORMATION: Under the

Real Estate Settlement Procedures Act of

1974 (12 U.S.C. 2601 et seq.) (RESPA),

the Secretary is to publish regulations

implementing the requirements in

Section 6 (12 U.S.C. 2605) concerning

the servicing of mortgage loans. On

December 19, 1994 (59 FR 65442), the

Department published a final rule

implementing Section 6 of RESPA. On

January 10, 1995 (60 FR 2642), the

Department published a substitute page

correcting Appendix MS–1 to Part 3500,

the Servicing Disclosure Statement, to

include the Acknowledgment of

Mortgage Loan Applicant that was

referenced in the rule text. In addition,

the January 10, 1995, publication

corrected a cross-reference in

§ 3500.21(e) of the rule.

Additional corrections are necessary:

(a) To clarify terminology relating to

the period of time applicable to certain

calculations;

(b) To clarify how long signed

acknowledgements must be retained;

(c) To clarify the contents of the

Notices of Transfer, including removing

one unnecessary requirement and

ensuring that borrowers are advised of

their rights in connection with

complaint resolution; and

(d) To clarify the protections

applicable to borrowers during a

transfer of loan servicing and to conform

the text of the rule with Appendix MS–

2, Notice of Assignment, Sale, or

Transfer of Servicing Rights.

In addition, the Department is

correcting a cross-reference in one of the

definitions applicable to part 3500.

Accordingly, 24 CFR 3500.2 is

amended and FR Doc. 94–30413, the

final rule on Real Estate Settlement

Procedures Act, Section 6 Transfer of

Servicing of Mortgage Loans (Regulation

X); and Real Estate Settlement

Procedures Act (Regulation X); Escrow

Accounting Procedures: Technical

Correction, published December 19,

1994 (59 FR 65442), is corrected, as

follows:

PART 3500—REAL ESTATE

SETTLEMENT PROCEDURES ACT

1. The authority citation for 24 CFR

part 3500 continues to read as follows:

Authority: 12 U.S.C. 2601 et seq.

2. In § 3500.2, the definition of

‘‘Lender’’ is amended by revising the

fourth sentence to read as follows:

§ 3500.2 Definitions.

* * * * *

Lender * * * See also § 3500.5(b)(7),

secondary market transactions.

* * * * *

§ 3500.21 [Corrected]

3. In the Federal Register of December

19, 1994, on page 65449, the second

sentence in § 3500.21(b)(3)(iii) is

amended at the first and fourth line of

the third column by substituting the

phrase ‘‘12-month period’’ for the

phrase ‘‘calendar year’’ in the two

places where it appears.

4. On page 65450, in the first column,

in § 3500.21, a new paragraph (c)(3) is

added, to read as follows:

§ 3500.21 Mortgage servicing transfers.

* * * * *

(c) * * *

(3) The signed Applicant

Acknowledgment(s) shall be retained for

a period of 5 years after the date of

settlement as part of the loan file for

every settled loan. There is no

requirement for retention of Applicant

Acknowledgment(s) if the loan is not

settled.

* * * * *

5. On page 65450, beginning in the

second column, in § 3500.21:

a. Paragraphs (d)(3) (ii) and (iii) are

revised;

b. The word ‘‘and’’ is removed

following the semicolon at the end of

paragraph (d)(3)(v) in the third column;

c. The period at the end of paragraph

(d)(3)(vi) in the third column is replaced

with the word ‘‘; and’’;

d. A new paragraph (d)(3)(vii) is

added; and

e. Paragraph (d)(5) is revised, to read

as follows:

* * * * *

(d) * * *

(3) * * *

(ii) The name, consumer inquiry

addresses (including, at the option of

the servicer, a separate address where

qualified written requests must be sent),

and a toll-free or collect-call telephone

number for an employee or department

of the transferee servicer;

(iii) A toll-free or collect-call

telephone number for an employee or

department of the transferor servicer

that can be contacted by the borrower

for answers to servicing transfer

inquiries;

* * * * *

(vii) A statement of the borrower’s

rights in connection with complaint

resolution, including the information set

forth in paragraph (e) of this section.

Appendix MS–2 of this part illustrates

a statement satisfactory to the Secretary.

* * * * *

(5) Consumer protection during

transfer of servicing. During the 60-day

period beginning on the effective date of

transfer of the servicing of any mortgage

servicing loan, if the transferor servicer

(rather than the transferee servicer that

should properly receive payment on the

loan) receives payment on or before the

applicable due date (including any grace

period allowed under the loan

documents), a late fee may not be

imposed on the borrower with respect to

that payment and the payment may not

be treated as late for any other purposes.

* * * * *

Dated: March 14, 1995.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal

Housing Commissioner.

[FR Doc. 95–6794 Filed 3–17–95; 8:45 am]

BILLING CODE 4210–27–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8590]

RIN 1545–AR10

Dividends Received Deduction Holding

Period Reduced for Periods Where

Risk of Loss Diminished

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the reduction in

the holding period of stock where a

taxpayer has diminished its risk of loss

by holding one or more other positions

with respect to substantially similar or
Federal Register / Vol. 60, No. 53 / Monday, March 20, 1995 / Rules and Regulations 14637

related property. In addition, this

document contains final regulations

relating to tax straddles involving stock

and substantially similar or related

property. The regulations, in response to

specific congressional direction, provide

guidance to taxpayers with respect to

the availability of the dividends

received deduction and the application

of the rules relating to tax straddles.

DATES: These regulations are effective

March 20, 1995.

For dates of applicability of these

regulations, see § 1.246–5(e) and

§ 1.1092(d)–2(b).

FOR FURTHER INFORMATION CONTACT:

Nicholas G. Bogos or Thomas M.

Preston of the Office of the Assistant

Chief Counsel, Financial Institutions

and Products, (202) 622–3920 or 622–

3940, respectively (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

On May 27, 1993, proposed

regulations § 1.246–5 and § 1.1092(d)–2

under sections 246(c)(4)(C) and

1092(d)(3)(B) respectively were

published in the Federal Register (58

FR 45080). A public hearing was held

on September 28, 1993. After IRS and

Treasury consideration of the public

comments on the proposed regulations,

the regulations are adopted as revised

by this Treasury decision.

Explanation of Provisions

The final regulations retain, with only

minor modifications, the definitions of

substantially similar or related property

and diminished risk of loss that are

contained in the proposed regulations.

Property is substantially similar or

related to stock if the property and the

stock primarily reflect the performance

of a single firm or enterprise, the same

industry or industries, or the same

economic factor or factors (such as

interest rates, commodity prices, or

foreign-currency exchange rates), and

changes in the fair market value of the

stock are reasonably expected to

approximate, directly or inversely,

changes in the fair market value of the

property. A taxpayer has diminished its

risk of loss if changes in the fair market

values of the stock and a position with

respect to substantially similar or

related property are reasonably expected

to vary inversely.

Several commentators argued that the

definition of substantially similar or

related property improperly focuses on

the economic relationship between the

stock and the other property held by the

taxpayer. They argued that this

approach fails to give independent

substance to the two parts of the

statutory test, namely, (a) risk reduction,

and (b) holding positions in

substantially similar or related property.

The IRS and Treasury believe that the

rule, as finalized, gives appropriate

weight both to risk reduction and to

whether the taxpayer holds a position in

substantially similar or related property.

The only way to determine when

properties are substantially similar or

related for purposes of section

246(c)(4)(C) is by taking into account the

economic characteristics of the

properties. A definition that did not

look to the economic relationships of

properties would give undue deference

to labels and would not serve the

purposes of section 246(c)(4)(C).

Several commentators suggested that

the regulations should provide a safe

harbor under which taxpayers could

establish that properties are not

substantially similar or related by

demonstrating a sufficiently low

mathematical correlation between the

changes in the price of stock and

changes in the price of the other

property. The final regulations do not

include the suggested safe harbor

because the IRS and Treasury have not

identified a simple, workable safe

harbor that would be appropriate in all

cases and that the IRS could effectively

administer. The IRS and Treasury

continue to welcome suggestions for a

safe harbor.

Although the final regulations retain

the definition of substantially similar or

related property, Example 6 of the

proposed regulations has been

eliminated. This example, which was

widely criticized by commentators,

concludes that a nonparticipating, fixedterm, preferred stock is substantially

similar to Treasury securities because

both types of property primarily reflect

the performance of the same economic

factor—interest rates—and changes in

the value of the stock will approximate

changes in the value of the Treasury

securities. The commentators argued

that, although hedging preferred stock

with Treasury securities may provide

protection against the impact of

substantial movements in overall

interest rates, the value of preferred

stock can also be significantly affected

by other economic factors, such as the

issuer’s credit risk. Thus, they argued,

the stock and the Treasury securities do

not primarily reflect the performance of

the same economic factor, and changes

in their fair market values are not

reasonably expected to approximate

each other.

Whether offsetting positions

constitute substantially similar or

related property is determined based on

the facts and circumstances of each

case. Commentators demonstrated that,

in many cases, changes in the price of

Treasury securities would not

approximate changes in the price of a

preferred stock. Therefore, Example 6 of

the proposed regulations has been

eliminated. Whether Treasury securities

or other interest-sensitive property is

substantially similar or related to a

particular preferred stock must be

decided on a case-by-case basis. The

elimination of Example 6 does not

preclude a finding that such property or

securities are substantially similar or

related to preferred stock in appropriate

cases.

Examples 3 and 8 of the proposed

regulations were eliminated because,

after further consideration, the IRS and

Treasury decided the regulations were

sufficiently clear without the examples.

The proposed regulations state that,

notwithstanding the general rule, two

portfolios of stocks are substantially

similar or related if changes in their fair

market values are reasonably expected

to approximate each other.

Commentators suggested that this rule

did not give effect to the statement in

the legislative history that the

substantially similar or related standard

is not satisfied merely because the

taxpayer is an investor with diversified

holdings and acquires a regulated

futures contract or an option on a stock

index to hedge general market risks.

Commentators suggested that, even if

changes in the values of two portfolios

approximate each other, the

substantially similar or related standard

should be met only if the portfolios

substantially overlap.

The final regulations adopt this

suggestion subject to an anti-abuse rule.

Under the final regulations, a position

that reflects the value of a portfolio is

not treated as substantially similar or

related to the taxpayer’s stock holdings

unless the stock holdings and the

portfolio substantially overlap. For this

purpose, a taxpayer’s stock holdings

substantially overlap with a portfolio if

the taxpayer holds 70 percent, by value,

of the stocks in the portfolio (that is, the

taxpayer holds 70 percent of the

capitalization of the portfolio). A

mechanical rule is provided for

determining substantial overlap. The

final regulations also define a portfolio

as 20 or more stocks and provide that

positions that reflect the value of more

than one stock but less than 20 are

treated as positions in each of the

underlying stocks.

If the anti-abuse rule applies, a

position that reflects the value of two or

more stocks (including a portfolio) is

treated as substantially similar or

related property even if those stocks and
14638 Federal Register / Vol. 60, No. 53 / Monday, March 20, 1995 / Rules and Regulations

the taxpayer’s stock holdings do not

substantially overlap. The anti-abuse

rule applies when the following two

conditions are met. First, changes in the

value of the position or the stocks

reflected in a position are reasonably

expected to virtually track (directly or

inversely) changes in the value of the

taxpayer’s stock holdings or any portion

of the taxpayer’s stock holdings and

other positions of the taxpayer; and,

second, the position is acquired or held

as part of a plan a principal purpose of

which is to obtain tax savings (including

by deferring tax) that are significantly in

excess of the expected pre-tax economic

profits from the plan. Of course,

common law doctrines and statutory

authorities, such as substance over form,

the sham transaction doctrine, and the

clear reflection of income requirement,

continue to apply notwithstanding any

provision of these regulations. See, e.g.,

Sheldon v. Commissioner, 94 T.C. 738

(1990).

The final regulations generally retain

the other provisions of the proposed

regulations with the following

modifications. The final regulations

define a position, for purposes of

section 246(c)(4)(C), as an interest

(including a futures or forward contract

or an option) in property or any

contractual right to a payment, whether

or not severable from stock or other

property. Thus, for purposes of section

246(c)(4)(C), stock coupled with an

option to sell the stock will not be

treated as a single instrument

(regardless of whether the option trades

separately from the stock). A position

does not, however, include traditional

equity rights to demand payment from

the issuer, such as rights traditionally

provided by mandatorily redeemable

preferred stock. The definition of

position does not apply for purposes of

section 1092, which includes its own

definition of position in section

1092(d)(2).

The final regulations make clear that

certain convertible instruments are

substantially similar or related property.

Thus, the holding period of stock may

be tolled if the taxpayer holds an

instrument that is convertible into

property that is substantially similar or

related to the taxpayer’s stock. The

situations identified in the final

regulations are taken directly from the

legislative history underlying the

statutory provision. See H.R. Conf. Rep.

No. 861, 98th Cong., 2d Sess. 818

(1984).

For hedges of positions other than

stock, the final regulations retain the

rule in the proposed regulations that

hedges of one position are not treated as

hedges of another position (including

stock). The final regulations clarify that

relationships established in the

taxpayer’s books and records at the time

the positions are entered into are given

substantial deference. In addition, the

final regulations provide that a taxpayer

that diminishes its risk of loss in stock

by holding a position in substantially

similar or related property is treated as

diminishing the risk of loss on the

shares with the shortest holding period.

The final regulations retain the rule in

the proposed regulations that a

guarantee, surety agreement, or similar

arrangement is treated as substantially

similar or related property if it

substantially offsets decreases in the fair

market value of the stock. The IRS and

Treasury caution that these

arrangements or similar rights (even if

they do not substantially offset

decreases in the fair market value of the

stock) may also be treated as options

(whether settled in cash or property) to

sell the stock for purposes of section

246(c)(4)(A). For example, if an

instrument is debt for state law

purposes but stock for federal income

tax purposes, creditor’s rights on the

instrument are treated as options to sell.

See Rev. Rul. 94–28, 1994–1 C.B. 86.

The final regulations clarify the

treatment of notional principal contracts

as substantially similar or related

property. Under the final regulations, an

analysis of whether a notional principal

contract is a position in substantially

similar or related property that

diminishes risk must take into account

the gross payments due under the

contract even if payments under the

contract are netted for other purposes.

Thus, a taxpayer cannot look solely to

the net payments that it expects to

receive and argue that, because

fluctuations in the value of the swap

may not approximate changes in the

value of the stock, the swap is not

substantially similar or related to the

stock, and does not diminish the

taxpayer’s risk of loss.

The final regulations defining

substantially similar or related property

under section 1092 of the Code are

found in new § 1.1092(d)–2. The

regulations provide that the definition

of the term substantially similar or

related property in § 1.246–5 is

generally applicable for purposes of

section 1092(d)(3)(B).

Effective Dates

The regulations contained in this

Treasury decision generally are effective

with respect to dividends received, and

to positions established, on or after

March 17, 1995 with respect to stock

acquired after July 18, 1984. However,

the regulations apply to dividends

received by a taxpayer on stock acquired

after July 18, 1984, and to positions

established after March 1, 1984, with

respect to certain specific transactions

listed in the legislative history.

Special Analysis

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It has also

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, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on their

impact on small business.

Drafting Information

The principal authors of these

regulations are Nicholas G. Bogos and

Thomas M. Preston, both of the 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.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended to read 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 * * *.

Section 1.246–5 also issued under 26

U.S.C. 246(c) and 7701(f). * * *

Section 1.1092(d)–2 also issued under 26

U.S.C. 1092(d)(3)(B). * * *

Par. 2. Section 1.246–5 is added to

read as follows:

§ 1.246–5 Reduction of holding periods in

certain situations.

(a) In general. Under section

246(c)(4)(C), the holding period of stock

for purposes of the dividends received

deduction is appropriately reduced for

any period in which a taxpayer has

diminished its risk of loss by holding

one or more other positions with respect

to substantially similar or related

property. This section provides rules for

applying section 246(c)(4)(C).
Federal Register / Vol. 60, No. 53 / Monday, March 20, 1995 / Rules and Regulations 14639

(b) Definitions—(1) Substantially

similar or related property. The term

substantially similar or related property

is applied according to the facts and

circumstances in each case. In general,

property is substantially similar or

related to stock when—

(i) The fair market values of the stock

and the property primarily reflect the

performance of—

(A) A single firm or enterprise;

(B) The same industry or industries;

or

(C) The same economic factor or

factors such as (but not limited to)

interest rates, commodity prices, or

foreign-currency exchange rates; and

(ii) Changes in the fair market value

of the stock are reasonably expected to

approximate, directly or inversely,

changes in the fair market value of the

property, a fraction of the fair market

value of the property, or a multiple of

the fair market value of the property.

(2) Diminished risk of loss. A taxpayer

has diminished its risk of loss on its

stock by holding positions with respect

to substantially similar or related

property if changes in the fair market

values of the stock and the positions are

reasonably expected to vary inversely.

(3) Position. For purposes of this

section, a position with respect to

property is an interest (including a

futures or forward contract or an option)

in property or any contractual right to

a payment, whether or not severable

from stock or other property. A position

does not include traditional equity

rights to demand payment from the

issuer, such as the rights traditionally

provided by mandatorily redeemable

preferred stock.

(4) Reasonable expectations. For

purposes of paragraphs (b)(1)(i), (b)(2),

or (c)(1)(vi) of this section, reasonable

expectations are the expectations of a

reasonable person, based on all the facts

and circumstances at the later of the

time the stock is acquired or the

positions are entered into. Reasonable

expectations include all explicit or

implicit representations made with

respect to the marketing or sale of the

position.

(c) Special rules—(1) Positions in

more than one stock—(i) In general.

This paragraph (c)(1) provides rules for

the treatment of positions that reflect

the value of more than one stock. In

general, positions that reflect the value

of a portfolio of stocks are treated under

the rules of paragraphs (c)(1) (ii) through

(iv) of this section, and positions that

reflect the value of more than one stock

but less than a portfolio are treated

under the rules of paragraph (c)(1)(v) of

this section. A portfolio for this purpose

is any group of stocks of 20 or more

unrelated issuers. Paragraph (c)(1)(vi) of

this section provides an anti-abuse rule.

(ii) Portfolios. Notwithstanding

paragraph (b)(1) of this section, a

position reflecting the value of a

portfolio of stocks is substantially

similar or related to the stocks held by

the taxpayer only if the position and the

taxpayer’s holdings substantially

overlap as of the most recent testing

date. A position may be substantially

similar or related to a taxpayer’s entire

stock holdings or a portion of a

taxpayer’s stock holdings.

(iii) Determining substantial overlap.

This paragraph (c)(1)(iii) provides rules

for determining whether a position and

a taxpayer’s stock holdings or a portion

of a taxpayer’s stock holdings

substantially overlap. Paragraphs

(c)(1)(iii) (A) through (C) of this section

determine whether there is substantial

overlap as of any testing date.

(A) Step One. Construct a subportfolio

(the Subportfolio) that consists of stock

in an amount equal to the lesser of the

fair market value of each stock

represented in the position and the fair

market value of the stock in the

taxpayer’s stock holdings. (The

Subportfolio may contain fewer than 20

stocks.)

(B) Step Two. If the fair market value

of the Subportfolio is equal to or greater

than 70 percent of the fair market value

of the stocks represented in the position,

the position and the Subportfolio

substantially overlap.

(C) Step Three. If the position does

not substantially overlap with the

Subportfolio, repeat Steps One and Two

(paragraphs (c)(1)(iii)(A) and (B) of this

section) reducing the size of the

position. The largest percentage of the

position that results in a substantial

overlap is substantially similar or

related to the Subportfolio determined

with respect to that percentage of the

position.

(iv) Testing date. A testing date is any

day on which the taxpayer purchases or

sells any stock if the fair market value

of the stock or the fair market value of

substantially similar or related property

is reflected in the position, any day on

which the taxpayer changes the

position, or any day on which the

composition of the position changes.

(v) Nonportfolio positions. A position

that reflects the fair market value of

more than one stock but not of a

portfolio of stocks is treated as a

separate position with respect to each of

the stocks the value of which the

position reflects.

(vi) Anti-abuse rule. Notwithstanding

paragraphs (c)(1)(i) through (v) of this

section, a position that reflects the value

of more than one stock is a position in

substantially similar or related property

to the appropriate portion of the

taxpayer’s stock holdings if—

(A) Changes in the value of the

position or the stocks reflected in the

position are reasonably expected to

virtually track (directly or inversely)

changes in the value of the taxpayer’s

stock holdings, or any portion of the

taxpayer’s stock holdings and other

positions of the taxpayer; and

(B) The position is acquired or held as

part of a plan a principal purpose of

which is to obtain tax savings (including

by deferring tax) the value of which is

significantly in excess of the expected

pre-tax economic profits from the plan.

(2) Options—(i) Options that are

significantly out of the money. For

purposes of paragraph (b)(2) of this

section, an option to sell that is

significantly out of the money does not

diminish the taxpayer’s risk of loss on

its stock unless the option is held as

part of a strategy to substantially offset

changes in the fair market value of the

stock.

(ii) Conversion rights.

Notwithstanding paragraphs (b)(1) and

(2) of this section, a taxpayer is treated

as diminishing its risk of loss by holding

substantially similar or related property

if it engages in the following

transactions or their substantial

equivalents—

(A) A short sale of common stock

while holding convertible preferred

stock of the same issuer and the price

changes of the convertible preferred

stock and the common stock are related;

(B) A short sale of a convertible

debenture while holding convertible

preferred stock into which the

debenture is convertible or common

stock; or

(C) A short sale of convertible

preferred stock while holding common

stock.

(3) Stacking rule. If a taxpayer

diminishes its risk of loss by holding a

position in substantially similar or

related property with respect to only a

portion of the shares that the taxpayer

holds in a particular stock, the holding

period of those shares having the

shortest holding period is reduced.

(4) Guarantees, surety agreements, or

similar arrangements. A taxpayer has

diminished its risk of loss on stock by

holding a position in substantially

similar or related property if the

taxpayer is the beneficiary of a

guarantee, surety agreement, or similar

arrangement and the guarantee, surety

agreement, or similar arrangement

provides for payments that will

substantially offset decreases in the fair

market value of the stock.
14640 Federal Register / Vol. 60, No. 53 / Monday, March 20, 1995 / Rules and Regulations

(5) Hedges counted only once. A

position established as a hedge of one

outstanding position, transaction, or

obligation of the taxpayer (other than

stock) is not treated as diminishing the

risk of loss with respect to any other

position held by the taxpayer. In

determining whether a position is

established to hedge an outstanding

position, transaction, or obligation of

the taxpayer, substantial deference will

be given to the relationships that are

established in its books and records at

the time the position is entered into.

(6) Use of related persons or passthrough entities. Positions held by a

party related to the taxpayer within the

meaning of sections 267(b) or 707(b)(1)

are treated as positions held by the

taxpayer if the positions are held with

a view to avoiding the application of

this section or § 1.1092(d)–2. In

addition, a taxpayer is treated as

diminishing its risk of loss by holding

substantially similar or related property

if the taxpayer holds an interest in, or

is the beneficiary of, a pass-through

entity, intermediary, or other

arrangement with a view to avoiding the

application of this section or

§ 1.1092(d)–2.

(7) Notional principal contracts. For

purposes of this section, rights and

obligations under notional principal

contracts are considered separately even

though payments with regard to those

rights and obligations are generally

netted for other purposes. Therefore, if

a taxpayer is treated under the

preceding sentence as receiving

payments under a notional principal

contract when the fair market value of

the taxpayer’s stock declines, the

taxpayer has diminished its risk of loss

by holding a position in substantially

similar or related property regardless of

the netting of the payments under the

contract for any other purposes.

(d) Examples. The following examples

illustrate the provisions of this section:

Example 1. General application to

common stock. Corporation A and

Corporation B are both automobile

manufacturers. The fair market values of

Corporation A and Corporation B

common stock primarily reflect the

value of the same industry. Because

Corporation A and Corporation B

common stock are affected not only by

the general level of growth in the

industry but also by individual

corporate management decisions and

corporate capital structures, changes in

the fair market value of Corporation A

common stock are not reasonably

expected to approximate changes in the

fair market value of the Corporation B

common stock. Under paragraph (b)(1)

of this section, Corporation A common

stock is not substantially similar or

related to Corporation B common stock.

Example 2. Common stock value

primarily reflects commodity price.

Corporation C and Corporation D both

hold gold as their primary asset, and

historically changes in the fair market

value of Corporation C common stock

approximated changes in the fair market

value of Corporation D common stock.

Corporation M purchased Corporation C

common stock and sold short

Corporation D common stock.

Corporation C common stock is

substantially similar or related to

Corporation D common stock because

their fair market values primarily reflect

the performance of the same economic

factor, the price of gold, and changes in

the fair market value of Corporation C

common stock are reasonably expected

to approximate changes in the fair

market value of Corporation D common

stock. It was reasonably expected that

changes in the fair market values of the

Corporation C common stock and the

short position in Corporation D common

stock would vary inversely. Thus,

Corporation M has diminished its risk of

loss on its Corporation C common stock

for purposes of section 246(c)(4)(C) and

this section by holding a position in

substantially similar or related property.

Example 3. Portfolios of stocks—(i)

Corporation Z holds a portfolio of stocks

and acquires a short position on a

publicly traded index through a

regulated futures contract (RFC) that

reflects the value of a portfolio of stocks

as defined in paragraph (c)(1)(i) of this

section. The index reflects the fair

market value of stocks A through T. The

values of stocks reflected in the index

and the values of the same stocks in

Corporation Z’s holdings are as follows:

Stock

Z’s

holdingsRFC Subportfolio

A ................. $300 $300 $300

B ................. 300 300 300

C ................ — 300 —

D ................ 400 500 400

E ................. 300 500 300

F ................. 300 500 300

G ................ 500 600 500

H ................ 300 300 300

I .................. — 300 —

J ................. 400 450 400

K ................. 200 500 200

L ................. 200 400 200

M ................ 200 500 200

N ................ 100 200 100

O ................ — 200 —

P ................. 200 200 200

Q ................ 100 300 100

R ................ 200 100 100

S ................. 100 100 100

Stock

Z’s

holdingsRFC Subportfolio

T ................. 100 200 100

Totals $4,200 $6,750 $4,100

(ii) The position is substantially

similar or related to Z’s stock holdings

only if they substantially overlap. To

determine whether they substantially

overlap, Corporation Z must construct a

Subportfolio of stocks with the lesser of

the value of the stock as reflected in the

RFC and its holdings. The Subportfolio

is given in the rightmost column above.

The value of the Subportfolio is 60.74

percent of the value of the stocks

represented in the position

($4100÷$6750), so the position and the

Subportfolio do not substantially

overlap.

(iii) To determine whether any

portion of the position substantially

overlaps with any portion of the Z’s

stock holdings, the values of the stocks

in the RFC are reduced for purposes of

the above steps. Eighty percent of the

position and the corresponding

subportfolio (consisting of stocks with a

value of the lesser of the stocks

represented in Z’s holdings and in 80

percent of the RFC) substantially

overlap, computed as follows:

Stock

Z’s

holdings

80% of

RFC Subportfolio

A ................. $300 $240 $240

B ................. 300 240 240

C ................ — 240 —

D ................ 400 400 400

E ................. 300 400 300

F ................. 300 400 300

G ................ 500 480 480

H ................ 300 240 240

I .................. — 240 —

J ................. 400 360 360

K ................. 200 400 200

L ................. 200 320 200

M ................ 200 400 200

N ................ 100 160 100

O ................ — 160 —

P ................. 200 160 160

Q ................ 100 240 100

R ................ 200 80 80

S ................. 100 80 80

T ................. 100 160 100

Totals $4,200 $5,400 $3,780

(iv) Because $3,780 is 70 percent of

$5,400, the Subportfolio substantially

overlaps with 80 percent of the position.

Under paragraph (c)(3) of this section,

Z’s stocks having the shortest holding

period are treated as included in the

Subportfolio. A larger portion of Z’s

stocks may be treated as substantially

similar or related property under the
Federal Register / Vol. 60, No. 53 / Monday, March 20, 1995 / Rules and Regulations 14641

anti-abuse rule of paragraph (c)(1)(vi) of

this section.

Example 4. Hedges counted only

once. January 1, 1996, Corporation X

owns a $100 million portfolio of stocks

all of which would substantially overlap

with a $100 million regulated futures

contract (RFC) on a commonly used

index (the Index). On January 15,

Corporation X enters into a $100 million

short position in an RFC on the Index

with a March delivery date and enters

into a $75 million long position in an

RFC on the Index for June delivery. Also

on January 15, 1996, Corporation X

indicates in its books and records that

the long and short RFC positions are

intended to offset one another. Under

paragraph (c)(5) of this section, $75

million of the short position in the RFC

is not treated as diminishing the risk of

loss on the stock portfolio and instead

is treated as a straddle or a hedging

transaction, as appropriate, with respect

to the $75 million long position in the

RFC, under section 1092. The remaining

$25 million short position is treated as

diminishing the risk of loss on the

portfolio by holding a position in

substantially similar or related property.

The rules of paragraph (c)(1) determine

how much of the portfolio is subject to

this rule and the rules of paragraph

(c)(3) determine which shares have their

holding periods tolled.

(e) Effective date—(1) In general. The

provisions of this section apply to

dividends received on or after March 17,

1995, on stock acquired after July 18,

1984.

(2) Special rule for dividends received

on certain stock. Notwithstanding

paragraph (e)(1) of this section, this

section applies to any dividends

received by a taxpayer on stock acquired

after July 18, 1984, if the taxpayer has

diminished its risk of loss by holding

substantially similar or related property

involving the following types of

transactions—

(i) The short sale of common stock

when holding convertible preferred

stock of the same issuer and the price

changes of the two stocks are related, or

the short sale of a convertible debenture

while holding convertible preferred

stock into which the debenture is

convertible (or common stock), or a

short sale of convertible preferred stock

while holding common stock; or

(ii) The acquisition of a short position

in a regulated futures contract on a stock

index, or the acquisition of an option to

sell the regulated futures contract or the

stock index itself, or the grant of a deepin-the-money option to buy the

regulated futures contract or the stock

index while holding the stock of an

investment company whose principal

holdings mimic the performance of the

stocks included in the stock index; or

alternatively, while holding a portfolio

composed of stocks that mimic the

performance of the stocks included in

the stock index.

Par. 3. Section 1.1092(d)–2 is added

to read as follows:

§ 1.1092(d)–2 Personal property.

(a) Special rules for stock. Under

section 1092(d)(3)(B), personal property

includes any stock 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

purposes of this rule, the term

substantially similar or related property

is defined in § 1.246–5 (other than

§ 1.246–5(b)(3)). The rule in § 1.246–

5(c)(6) does not narrow the related party

rule in section 1092(d)(4).

(b) Effective date—(1) In general. This

section applies to positions established

on or after March 17, 1995.

(2) Special rule for certain straddles.

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—

(i) 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

(ii) 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.

Dated: March 3, 1995.

Approved: Leslie Samuels, Assistant

Secretary of the Treasury (Tax Policy).

[FR Doc. 95–6693 Filed 3–17–95; 8:45 am]

BILLING CODE 4830–01–U

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 300

[FRL–5173–4]

The National Priorities List for

Uncontrolled Hazardous Waste Sites;

Deletion Policy for Resource

Conservation and Recovery Act

Facilities

AGENCY: Environmental Protection

Agency.

ACTION: Notice of policy statement.

SUMMARY: The Environmental Protection

Agency (‘‘EPA’’) is announcing a policy

relating to the National Oil and

Hazardous Substances Contingency Plan

(‘‘NCP’’), 40 CFR part 300, which was

promulgated pursuant to section 105 of

the Comprehensive Environmental

Response, Compensation, and Liability

Act of 1980 (‘‘CERCLA’’) (amended by

the Superfund Amendments and

Reauthorization Act of 1986 (‘‘SARA’’))

and Executive Order 12580 (52 FR 2023,

January 29, 1987). CERCLA requires that

the NCP include a list of national

priorities among the known releases or

threatened releases of hazardous

substances, pollutants or contaminants

throughout the United States, and that

the list be revised at least annually. The

National Priorities List (‘‘NPL’’),

initially promulgated as Appendix B of

the NCP on September 8, 1983 (48 FR

40658), constitutes this list.

This document describes a policy for

deleting sites from the NPL and

deferring them to the Resource

Conservation and Recovery Act

(‘‘RCRA’’), as amended by the

Hazardous and Solid Waste

Amendments of 1984 (‘‘HSWA’’)

corrective action program, if they meet

the eligibility criteria for deletion set out

in the NCP. EPA requested public

comment on this policy on December

21, 1988 (53 FR 51421). The policy

applies to sites on the NPL that are

RCRA-regulated facilities engaged in

treatment, storage or disposal of

hazardous waste (‘‘TSDs’’ under the

RCRA program).

EFFECTIVE DATE: This policy is effective

on April 19, 1995.

ADDRESSES: Comments received and the

Agency’s responses to them are

contained in the Headquarters

Superfund Docket. The Headquarters

Superfund Docket is located at the U.S.

Environmental Protection Agency,

Crystal Gateway #1, 12th Floor, 1235

Jefferson Davis Highway, Arlington, VA.

It is available for viewing by

appointment only from 9:00 a.m. to 4:00