I

105TH CONGRESS

1ST SESSION H. R. 846

To amend the Internal Revenue Code of 1986 to require gain recognition

in the case of certain transactions that are equivalent to sales of financial

instruments, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 26, 1997

Mrs. KENNELLY of Connecticut introduced the following bill; which was

referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to require

gain recognition in the case of certain transactions that

are equivalent to sales of financial instruments, and for

other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. CONSTRUCTIVE SALES TREATMENT FOR AP4 PRECIATED FINANCIAL POSITIONS.

5 (a) IN GENERAL.—Part IV of subchapter P of chap6 ter 1 of the Internal Revenue Code of 1986 is amended

7 by adding at the end the following new section:
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1 ‘‘SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR AP2 PRECIATED FINANCIAL POSITIONS.

3 ‘‘(a) IN GENERAL.—If there is a constructive sale of

4 an appreciated financial position—

5 ‘‘(1) the taxpayer shall recognize gain as if such

6 position were sold for its fair market value on the

7 date of such constructive sale (and any gain shall be

8 taken into account for the taxable year which in9 cludes such date), and

10 ‘‘(2) for purposes of applying this title for peri11 ods after the constructive sale—

12 ‘‘(A) proper adjustment shall be made in

13 the amount of any gain or loss subsequently re14 alized with respect to such position for any gain

15 taken into account by reason of paragraph (1),

16 and

17 ‘‘(B) the holding period of such position

18 shall be determined as if such position were

19 originally acquired on the date of such con20 structive sale.

21 ‘‘(b) APPRECIATED FINANCIAL POSITION.—For pur22 poses of this section—

23 ‘‘(1) IN GENERAL.—The term ‘appreciated fi24 nancial position’ means any position with respect to

25 any stock, debt instrument, or partnership interest

26 if there would be gain were such position sold.
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1 ‘‘(2) POSITION.—The term ‘position’ means an

2 interest, including a futures or forward contract,

3 short sale, or option.

4 ‘‘(c) CONSTRUCTIVE SALE.—For purposes of this

5 section—

6 ‘‘(1) IN GENERAL.—A taxpayer shall be treated

7 as having made a constructive sale of an appreciated

8 financial position if the taxpayer (or a related per9 son)—

10 ‘‘(A) makes a short sale of the same or

11 substantially identical property,

12 ‘‘(B) enters into an offsetting notional

13 principal contract with respect to the same or

14 substantially identical property,

15 ‘‘(C) enters into a futures or forward con16 tract to deliver the same or substantially iden17 tical property,

18 ‘‘(D) in the case of an appreciated finan19 cial position that is a short sale or a contract

20 described in subparagraph (B) or (C) with re21 spect to any property, acquires the same or

22 substantially identical property, or

23 ‘‘(E) enters into 1 or more other trans24 actions (or acquires 1 or more positions) that
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1 have substantially the same effect as a trans2 action described in any of the preceding sub3 paragraphs.

4 ‘‘(2) EXCEPTION FOR TRANSACTIONS MARKED

5 TO MARKET.—The term ‘constructive sale’ shall not

6 include any transaction if the appreciated financial

7 position which is part of such transaction is marked

8 to market under section 475 or 1256.

9 ‘‘(3) EXCEPTION FOR SALES OF NONPUBLICLY

10 TRADED PROPERTY.—The term ‘constructive sale’

11 shall not include any contract for sale of any stock,

12 debt instrument, or partnership interest which is not

13 a marketable security (as defined in section 453(f))

14 if the sale occurs within 1 year after the date such

15 contract is entered into.

16 ‘‘(4) EXCEPTION FOR TRANSACTIONS WHICH

17 ARE CLOSED BY YEAR END.—In applying this sec18 tion, there shall be disregarded—

19 ‘‘(A) any appreciated financial position

20 which is sold or otherwise disposed of during

21 the taxable year in a transaction in which gain

22 or loss is recognized, and

23 ‘‘(B) any other transaction (which would

24 otherwise be treated as a constructive sale) if—
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1 ‘‘(i) such transaction is closed before

2 the end of the taxable year, and

3 ‘‘(ii) in the case of a transaction

4 which is closed during the last 30 days of

5 such taxable year, another transaction with

6 substantially the same effect as the closed

7 transaction is not entered into during the

8 31-day period beginning with the date on

9 which such transaction was closed.

10 ‘‘(5) RELATED PERSON.—A person is related to

11 another person with respect to a transaction if—

12 ‘‘(A) the relationship is described in sec13 tion 267 or 707(b), and

14 ‘‘(B) such transaction is entered into with

15 a view toward avoiding the purposes of this sec16 tion.

17 ‘‘(6) SPECIAL RULE FOR DEBT INSTRU18 MENTS.—For purposes of paragraph (1)(A), posi19 tions in interest rates shall be treated as positions

20 in property which are substantially identical to debt

21 instruments.

22 ‘‘(d) OTHER DEFINITIONS.—For purposes of this

23 section—
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1 ‘‘(1) FORWARD CONTRACT.—The term ‘forward

2 contract’ includes a fully or partially prepaid for3 ward contract.

4 ‘‘(2) OFFSETTING NOTIONAL PRINCIPAL CON5 TRACT.—The term ‘offsetting notional principal con6 tract’ means, with respect to any property, an agree7 ment to pay the investment yield (including appre8 ciation) on such property for a specified period in

9 exchange for the right to be reimbursed for any de10 cline in the value of such property and for other con11 sideration.

12 ‘‘(e) SPECIAL RULES.—

13 ‘‘(1) TREATMENT OF SUBSEQUENT SALE OF

14 POSITION WHICH WAS DEEMED SOLD.—If—

15 ‘‘(A) there is a constructive sale of any ap16 preciated financial position,

17 ‘‘(B) such position is subsequently sold or

18 otherwise disposed of, and

19 ‘‘(C) at the time of such sale or disposi20 tion, the transaction resulting in the construc21 tive sale of such position is open with respect

22 to the taxpayer or any related person,

23 solely for purposes of determining whether the tax24 payer has entered into a constructive sale of any
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1 other appreciated financial position held by the tax2 payer, the taxpayer shall be treated as entering into

3 such transaction immediately after such sale or

4 other disposition.

5 ‘‘(2) CERTAIN TRUST INSTRUMENTS TREATED

6 AS STOCK.—For purposes of this section, an interest

7 in a trust which is actively traded (within the mean8 ing of section 1092(d)(1)) shall be treated as stock.

9 ‘‘(3) MULTIPLE POSITIONS IN PROPERTY.—If

10 there is a constructive sale of a portion of any prop11 erty held by the taxpayer, the determination of the

12 specific property which is deemed sold shall be made

13 in the same manner as if the constructive sale were

14 an actual sale; except that property treated as sold

15 by reason of a prior constructive sale that remains

16 open shall be disregarded.

17 ‘‘(f) REGULATIONS.—The Secretary shall prescribe

18 such regulations as may be necessary or appropriate to

19 carry out the purposes of this section.’’

20 (b) SECURITIES TRADERS MAY ELECT MARK TO

21 MARKET.—Subsection (d) of section 475 (relating to

22 mark to market accounting method for dealers in securi23 ties) is amended by adding at the end the following new

24 paragraph:
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1 ‘‘(4) SECURITIES TRADERS MAY ELECT MARK

2 TO MARKET.—In the case of a person engaged in the

3 trade or business of being an active trader in securi4 ties—

5 ‘‘(A) such person may elect to be treated

6 as a dealer in securities for purposes of this

7 section, and

8 ‘‘(B) securities held by such person in con9 nection with such trade or business shall be

10 treated as not held for investment.

11 Such an election may be made without the consent

12 of the Secretary and, if made, shall apply to the tax13 able year for which made and all subsequent taxable

14 years unless revoked with the consent of the Sec15 retary.’’

16 (c) CLERICAL AMENDMENT.—The table of sections

17 for part IV of subchapter P of chapter 1 of such Code

18 is amended by adding at the end the following new item:

‘‘Sec. 1259. Constructive sales treatment for appreciated financial

positions.’’

19 (d) EFFECTIVE DATE.—

20 (1) IN GENERAL.—Except as provided in para21 graph (3), the amendments made by this section

22 shall apply to—

23 (A) any constructive sale after the date of

24 the enactment of this Act, and
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1 (B) any constructive sale after January

2 12, 1996, and before the date of the enactment

3 of this Act, but only if, on the date which is 30

4 days after the date of the enactment of this

5 Act, the taxpayer owns the appreciated finan6 cial position subject to the constructive sale and

7 the transaction that resulted in the construction

8 sale remains open with respect to the taxpayer

9 or a related person.

10 In a case to which subparagraph (B) applies, section

11 1259 of the Internal Revenue Code of 1986 (as

12 added by this section) shall be applied as if the con13 structive sale occurred on the date which is 30 days

14 after the date of the enactment of this Act.

15 (2) SPECIAL RULE.—In the case of a decedent

16 dying after the date of the enactment of this Act,

17 if—

18 (A) there was a constructive sale on or be19 fore such date of enactment of any appreciated

20 financial position, and

21 (B) on the day before the date of the dece22 dent’s death, the transaction resulting in the

23 constructive sale of such position is open with

24 respect to the decedent or any related person

25 and gain has not been recognized under section
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1 1259 of the Internal Revenue Code of 1986 (as

2 added by this section),

3 for purposes of such Code, such position (and any

4 property related thereto, as determined under the

5 principles of section 1259(d)(1) of such Code (as so

6 added)) shall be treated as property constituting

7 rights to receive an item of income in respect of a

8 decedent under section 691 of such Code.

9 (3) ELECTION OF SECURITIES TRADERS TO BE

10 TREATED AS DEALERS.—

11 (A) IN GENERAL.—The amendment made

12 by subsection (b) shall apply to taxable years

13 beginning after the date of the enactment of

14 this Act.

15 (B) 5-YEAR SPREAD OF ADJUSTMENTS.—

16 In the case of a taxpayer who elects under sec17 tion 475(d)(4) of the Internal Revenue Code of

18 1986 (as added by this section) to change its

19 method of accounting for its first taxable year

20 beginning after the date of the enactment of

21 this Act, the net amount of the adjustments re22 quired to be taken into account by the taxpayer

23 under section 481 of the Internal Revenue Code

24 of 1986 shall be taken into account ratably over
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1 the 5-taxable year period beginning with such

2 first taxable year.

3 SEC. 2. LIMITATION ON EXCEPTION FOR INVESTMENT COM4 PANIES UNDER SECTION 351.

5 (a) IN GENERAL.—Paragraph (1) of section 351(e)

6 of the Internal Revenue Code of 1986 (relating to excep7 tions) is amended by adding at the end the following: ‘‘The

8 determination of whether a company is an investment

9 company shall be made by taking into account all stock

10 and securities held by the company, whether or not readily

11 marketable.’’

12 (b) EFFECTIVE DATE.—The amendment made by

13 subsection (a) shall apply to transfers after the date of

14 the enactment of this Act in taxable years ending after

15 such date.

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