‘‘(3) INTEREST
ACCRUAL
AMOUNT
IN
SUC-
CEEDING
YEARS
UNAFFECTED
BY
LIMITATION.— 
Solely for purposes of subsection (e)(1), the adjusted 
basis in a publicly traded prepaid derivative contract 
shall be determined without regard to paragraph (1). 
‘‘(g) EXCEPTION
FOR SHORT HOLDING PERIODS 
AND INSTRUMENTS MARKED TO MARKET.—This section 
shall not apply to any prepaid derivative contract for any 
taxable year if such contract— 
‘‘(1) has been held for less than 1 year and is 
disposed of in the taxable year in which acquired or 
on or before the due date for the return of income 
tax for such taxable year (without regard to any ex-
tension of time for filing such return), or 
‘‘(2) is marked to market with respect to the 
taxpayer for such taxable year under section 475 or 
1256 or any other provision of this title. 
‘‘(h) REGULATIONS.—The Secretary shall issue such 
regulations as are necessary or appropriate to carry out 
the purposes of this section, including regulations to pre-
vent the avoidance of the purposes of this section. 
‘‘SEC. 1290. DEFINITIONS. 
‘‘For purposes of this subpart— 
‘‘(1) PREPAID DERIVATIVE CONTRACT.— 
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‘‘(A) IN GENERAL.—The term ‘prepaid de-
rivative contract’ means any prepaid contract 
with a term of longer than 1 year from the date 
of issue which is a derivative financial instru-
ment with respect to— 
‘‘(i) any security (as defined in section 
475(c)(2), determined without regard to 
subparagraph (F) and the last sentence 
thereof) or group of securities (as so de-
fined), 
‘‘(ii) any commodity (as defined in 
section 475(e)(2), determined without re-
gard to subparagraph (D) thereof) or 
group of commodities (as so defined), or 
‘‘(iii) any financial index. 
‘‘(B) EXCEPTIONS.—Such term shall not 
include any instrument which is treated (for 
purposes of this title) as— 
‘‘(i) stock or debt, 
‘‘(ii) an interest in a partnership, 
‘‘(iii) part of a constructive ownership 
transaction to which section 1260 applies, 
‘‘(iv) a hedging transaction (as de-
fined in section 1256(e)(2)), 
‘‘(v) a notional principal contract, or 
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‘‘(vi) an option. 
‘‘(C) CERTAIN
OPTIONS
ECONOMICALLY 
SIMILAR TO OWNERSHIP.—To the extent pro-
vided by the Secretary in regulations or other 
guidance, any option which by reason of such 
option’s term and strike price is economically 
similar to a prepaid contract described in sub-
paragraph (A) shall not be treated as an option 
for purposes of subparagraph (B)(vi). 
‘‘(2) PREPAID CONTRACT.—The term ‘prepaid 
contract’ means any contract under which there is 
no substantial likelihood that the taxpayer will be re-
quired to pay any additional amount under the con-
tract. For purposes of the preceding sentence, a tax-
payer shall not be treated as having a substantial 
likelihood of being required to pay any additional 
amount if those additional amounts have been set 
aside (or are expected to be set aside) with respect 
to such payment or are subject to a defeasance ar-
rangement or other arrangement similar to an ar-
rangement described in section 470(d)(1)(B). 
‘‘(3) PUBLICLY TRADED PREPAID DERIVATIVE 
CONTRACT.—The term ‘publicly traded prepaid de-
rivative contract’ means any prepaid derivative con-
tract— 
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‘‘(A) which is traded on or subject to the 
rules of a qualified board or exchange, or 
‘‘(B) with respect to which the issuer (or 
any person acting on behalf of the issuer) regu-
larly makes available to the public (including 
customers or subscribers) bid or offer quotes 
and stands ready to effect buy or sell trans-
actions at the quoted prices for itself or on be-
half of others.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) The table of subparts for part V of sub-
chapter P of chapter 1 of such Code is amended by 
adding at the end the following new item: 
‘‘SUBPART E—PREPAID DERIVATIVE CONTRACTS.’’. 
(2) The heading of part V of subchapter P of 
chapter 1 of such Code, and the item relating to 
such part in the table of parts for subchapter P of 
chapter 1 of such Code, are each amended by strik-
ing ‘‘debt’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to contracts acquired after the date 
of the enactment of this Act. 
Æ 
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