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position or other termination of a position which was
held as a part of such transaction.
The Secretary shall by regulations provide for such reduc-
tions in the applicable imputed income amount as may be
appropriate by reason of amounts capitalized under section
263(g), ordinary income received, or otherwise.
‘‘(c) CONVERSION TRANSACTION.—For purposes of this
section, the term ‘conversion transaction’ means any trans-
action—
‘‘(1) substantially all of the taxpayer’s expected
return from which is attributable to the time value of
the taxpayer’s net investment in such transaction,
and
‘‘(2) which is—
‘‘(A) the holding of any property (whether
or not actively traded), and the entering into a
contract to sell such property (or substantially
identical property) at a price determined in ac-
cordance with such contract, but only if such
property was acquired and such contract was en-
tered into on a substantially contemporaneous
basis,
‘‘(B) an applicable straddle,
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‘‘(C) any other transaction which is mar-
keted or sold as producing capital gains and as
a transaction described in paragraph (1), or
‘‘(D) any other transaction specified in reg-
ulations prescribed by the Secretary.
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) APPLICABLE STRADDLE.—The term ‘appli-
cable straddle’ means any straddle (within the mean-
ing of section 1092(c)); except that the term ‘personal
property’ shall include stock.
‘‘(2) APPLICABLE RATE.—The term ‘applicable
rate’ means—
‘‘(A) the applicable Federal rate determined
under section 1274(d) (compounded semiannu-
ally) as if the conversion transaction were a debt
instrument, or
‘‘(B) if the term of the conversion trans-
action is indefinite, the Federal short-term rates
in effect under section 6621(b) during the period
of the conversion transaction (compounded
daily).
‘‘(3) TREATMENT OF BUILT-IN LOSSES.—
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‘‘(A) IN GENERAL.—If any position with a
built-in loss becomes part of a conversion trans-
action—
‘‘(i) for purposes of applying this sub-
title to such position for periods after such
position becomes part of such transaction,
such position shall be taken into account at
its fair market value as of the time it be-
came part of such transaction, except that
‘‘(ii) upon the disposition or other ter-
mination of such position in a transaction
in which gain or loss is recognized, such
built-in loss shall be recognized and shall
have a character determined without regard
to this section.
‘‘(B) BUILT-IN LOSS.—For purposes of sub-
paragraph (A), the term ‘built-in loss’ means the
loss (if any) which would have been realized if
the position had been disposed of or otherwise
terminated at its fair market value as of the
time such position became part of such trans-
action.
‘‘(4) POSITION TAKEN INTO ACCOUNT AT FAIR
MARKET VALUE.—In determining the taxpayer’s net
investment in any conversion transaction, there shall
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be included the fair market value of any position
which becomes part of such transaction (determined
as of the time such position became part of such
transaction).
‘‘(5) SPECIAL RULE FOR OPTIONS DEALERS AND
COMMODITIES TRADERS.—
‘‘(A) IN GENERAL.—Subsection (a) shall not
apply to transactions —
‘‘(i) of an options dealer in the normal
course of the dealer’s trade or business of
dealing with options, or
‘‘(ii) of a commodities trader in the
normal course of the trader’s trade or busi-
ness of trading section 1256 contracts.
‘‘(B) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) OPTIONS DEALER.—The term ‘op-
tions dealer’ has the meaning given such
term by section 1256(g)(8).
‘‘(ii) COMMODITIES
TRADER.— The
term ‘commodities trader’ means any per-
son who is a member (or, to the extent pro-
vided in regulations, is entitled to trade as
a member) of a domestic board of trade
which is designated as a contract market by
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the Commodity Futures Trading Commis-
sion.
‘‘(C) LIMITED PARTNERS AND LIMITED EN-
TREPRENEURS.—In the case of any gain from a
transaction recognized by an entity which is al-
locable to a limited partner or limited entre-
preneur 
(within 
the 
meaning 
of 
section
464(e)(2)), subparagraph (A) shall not apply
if—
‘‘(i) substantially all of the limited
partner’s (or limited entrepreneur’s) ex-
pected return from the entity is attributable
to the time value of the partner’s (or entre-
preneur’s) net investment in such entity,
‘‘(ii) the transaction (or the interest in
the entity) was marketed or sold as produc-
ing capital gains treatment and as a trans-
action described in subsection (c)(1), or
‘‘(iii) the transaction (or the interest
in the entity) is a transaction (or interest)
specified in regulations prescribed by the
Secretary.’’
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part IV of subchapter P of chapter 1 is