[Federal Register Volume 78, Number 149 (Friday, August 2, 2013)]
[Rules and Regulations]
[Pages 46807-46809]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-18702]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9627]
RIN 1545-BL04


Mixed Straddles; Straddle-by-Straddle Identification Under 
Section 1092(b)(2)(A)(i)(I)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains guidance for those taxpayers electing 
to establish a mixed straddle using straddle-by-straddle 
identification. These temporary regulations explain how to account for 
unrealized gain or loss on a position held by a taxpayer prior to the 
time the taxpayer establishes a mixed straddle using straddle-by-
straddle identification. The text of these temporary regulations also 
serves as the text of the proposed regulations (REG-112815-12) set 
forth

[[Page 46808]]

in the Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on August 1, 
2013.
    Applicability Date: For the date of applicability, see Sec.  
1.1092(b)-6T(c).

FOR FURTHER INFORMATION CONTACT: Elizabeth M. Bouzis or Robert B. 
Williams at (202) 622-3950 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    The Tax Reform Act of 1984 (Pub. L. 98-369, 98 Stat. 494) amended 
section 1092(b) of the Internal Revenue Code (Code) to add, among other 
items, an election to establish a mixed straddle using straddle-by-
straddle identification (a section 1092(b)(2) identified mixed 
straddle).
    On January 24, 1985, the Treasury Department and the IRS published 
a notice of proposed rulemaking by cross-reference to temporary 
regulations (50 FR 3351, January 24, 1985). Included in the temporary 
regulations was Sec.  1.1092(b)-3T (TD 8008, 1985-1 CB 276), which 
describes how to account for a section 1092(b)(2) identified mixed 
straddle. In particular, Sec.  1.1092(b)-3T(b)(6) currently requires 
that unrealized gain or loss on a position that becomes a position in a 
section 1092(b)(2) identified mixed straddle be recognized on the day 
prior to establishing the section 1092(b)(2) identified mixed straddle. 
After filing of these temporary regulations in the Federal Register, 
Sec.  1.1092(b)-3T(b)(6) will apply to only those section 1092(b)(2) 
identified mixed straddles established on or before August 1, 2013.
    The approach taken in Sec.  1.1092(b)-3T(b)(6) is suggested by the 
legislative history of section 1092, but it has come to the attention 
of the Treasury Department and the IRS that this paragraph arguably 
permits taxpayers to selectively recognize gains and losses in 
inappropriate circumstances and without market constraints. Thus, for 
example, a taxpayer could seek to use the identified mixed straddle 
rules in Sec.  1.1092(b)-3T(b)(6) to accelerate a loss on a position 
that could not be marked to market or easily disposed of. When 
taxpayers use the section 1092(b)(2) identified mixed straddle rules to 
serve as an alternative to selling or otherwise disposing of a 
position, the general rules governing when gain and loss are recognized 
are undermined. The Treasury Department and the IRS believe that it is 
appropriate to act promptly to prevent these types of transactions 
because they represent a use of section 1092 that was not intended. 
Accordingly, these temporary regulations add a new Sec.  1.1092(b)-6T 
and limit the application of Sec.  1.1092(b)-3T as described in this 
preamble. Section 1.1092(b)-6T will apply to all section 1092(b)(2) 
identified mixed straddles established after August 1, 2013.
    Section 1.1092(b)-6T provides that unrealized gain or loss on a 
position held prior to establishing a section 1092(b)(2) identified 
mixed straddle is taken into account at the time, and has the 
character, provided by provisions of the Code that would apply if the 
section 1092(b)(2) identified mixed straddle had not been established, 
rather than on the day prior to establishing the section 1092(b)(2) 
identified mixed straddle as is required by Sec.  1.1092(b)-3T(b)(6). 
Section 1.1092(b)-6T does not, however, override other provisions that 
require the recognition of gain or loss. Thus, for example, if a 
taxpayer enters into a transaction that creates a constructive sale 
under section 1259, the rules of section 1259 continue to apply. Under 
Sec.  1.1092(b)-6T, the provisions of Sec.  1.1092(b)-3T, with the 
exception of Sec.  1.1092(b)-3T(b)(6), will also continue to apply to 
changes in the value of a position held after a section 1092(b)(2) 
identified mixed straddle is established. As a result, pre-straddle 
gain or loss will be accounted for under other provisions of the Code, 
while gain or loss incurred while the straddle is in place will be 
accounted for using the straddle rules in section 1092. Under Sec.  
1.1092(b)-6T, the holding period of a position held prior to 
establishing a section 1092(b)(2) identified mixed straddle will 
continue to be determined using the rules in Sec.  1.1092(b)-2T.
    It is important to account for pre-straddle gain and loss 
separately from gain and loss on positions while a straddle is in 
place. Therefore, Sec.  1.1092(b)-6T will continue to require the 
segregation of pre-straddle and straddle period gain and loss, but it 
will do so without requiring current recognition of unrealized gain and 
loss.
    Section 1.1092(b)-6T will apply to all section 1092(b)(2) 
identified mixed straddles established after August 1, 2013, regardless 
of when any position that is a component of the section 1092(b)(2) 
identified mixed straddle was purchased or otherwise acquired.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. 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) does 
not apply to these regulations. For the applicability of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) refer to the Special Analyses 
section of the preamble to the cross-reference notice of proposed 
rulemaking published in the Proposed Rules section in this issue of the 
Federal Register. Pursuant to section 7805(f) of the Code, these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Drafting Information

    The principal author of these regulations is Elizabeth M. Bouzis, 
Office of Associate Chief Counsel (Financial Institutions and 
Products). However, other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
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 1.1092(b)-6T also issued under 26 U.S.C. 1092(b)(1).
    Section 1.1092(b)-6T also issued under 26 U.S.C. 1092(b)(2). * * 
*


0
Par. 2. Section 1.1092(b)-3T is amended by:
0
1. Revising the paragraph heading of paragraph (b)(6).
0
2. Adding a new first sentence to paragraph (b)(6).
    The revision and addition read as follows:


Sec.  1.1092(b)-3T  Mixed straddles; straddle-by-straddle 
identification under section 1092(b)(2)(A)(i)(I) (Temporary).

* * * * *
    (b) * * *
    (6) Accrued gain and loss with respect to positions of a section 
1092(b)(2) identified mixed straddle established on or before August 1, 
2013. The rules of this paragraph (b)(6) apply to all section 
1092(b)(2) identified mixed straddles established on or before August 
1, 2013; see Sec.  1.1092(b)-6T for section 1092(b)(2)

[[Page 46809]]

identified mixed straddles established after August 1, 2013.* * *
* * * * *

0
Par. 3. Section 1.1092(b)-6T is added to read as follows:


Sec.  1.1092(b)-6T  Mixed straddles; accrued gain and loss associated 
with a position that becomes part of a section 1092(b)(2) identified 
mixed straddle that is established after August 1, 2013 (Temporary).

    (a) In general. Except as otherwise provided, if one or more 
positions of a section 1092(b)(2) identified mixed straddle were held 
by the taxpayer on the day prior to the day the section 1092(b)(2) 
identified mixed straddle is established, any unrealized gain or loss 
on the day prior to the day the section 1092(b)(2) identified mixed 
straddle is established with respect to such position or positions is 
taken into account at the time, and has the character, provided by the 
provisions of the Internal Revenue Code that would apply to the gain or 
loss if the section 1092(b)(2) identified mixed straddle were not 
established. Unrealized gain or loss is the difference between the fair 
market value of the position or positions on the day before a section 
1092(b)(2) identified mixed straddle is established and the taxpayer's 
basis in that position or positions. See Sec.  1.1092(b)-2T for 
treatment of holding periods with respect to such positions. Changes in 
value of the position or positions that occur after the section 
1092(b)(2) identified mixed straddle is established are accounted for 
under the other provisions of Sec.  1.1092(b)-3T.
    (b) Examples. Paragraph (a) of this section may be illustrated by 
the following examples. It is assumed in each example that the 
positions are the only positions held directly or indirectly (through a 
related person or flowthrough entity) by an individual calendar year 
taxpayer during the taxable year and no section 1256 contract is 
substantially identical to an offsetting non-section 1256 contract. It 
is also assumed that any gain or loss recognized on disposition of any 
position in the straddle would be capital gain or loss.

    Example 1. On August 13, 2013, A enters into a section 1256 
contract. As of the close of the day on August 15, 2013, there is 
$500 of unrealized loss on the section 1256 contract. On August 16, 
2013, A enters into an offsetting non-section 1256 position and 
makes a valid election to treat the straddle as a section 1092(b)(2) 
identified mixed straddle. A continues to hold both positions of the 
section 1092(b)(2) identified mixed straddle on January 1, 2014. 
Under these circumstances, A will recognize the $500 loss on the 
section 1256 contract that existed prior to establishing the section 
1092(b)(2) identified mixed straddle on the last business day of 
2013 because the section 1256 contract would be treated as sold on 
December 31, 2013, (the last business day of the taxable year) under 
section 1256(a). The loss recognized in 2013 will be treated as 60% 
long-term capital loss and 40% short-term capital loss. All gains 
and losses occurring after the section 1092(b)(2) identified mixed 
straddle is established are accounted for under the applicable 
provisions in Sec.  1.1092(b)-3T.
    Example 2. On September 3, 2012, A enters into a non-section 
1256 position. As of the close of the day on August 22, 2013, there 
is $400 of unrealized short-term capital gain on the non-section 
1256 position. On August 23, 2013, A enters into an offsetting 
section 1256 contract and makes a valid election to treat the 
straddle as a section 1092(b)(2) identified mixed straddle. On 
September 10, 2013, A closes out the section 1256 contract at a $500 
loss and disposes of the non-section 1256 position, realizing an 
$875 gain. Under these circumstances, A has $400 of short-term 
capital gain attributable to the non-section 1256 position prior to 
the day the section 1092(b)(2) identified mixed straddle was 
established. The $400 unrealized gain earned on the non-section 1256 
position will be recognized on September 10, 2013, when the non-
section 1256 position is disposed of. The gain will be short-term 
capital gain because, if the non-section 1256 position had been 
disposed of prior to establishing the section 1092(b)(2) identified 
mixed straddle, the gain would not have been long-term capital gain. 
See Sec.  1.1092(b)-2T for rules concerning holding period. On 
September 10, 2013, the gain of $875 on the non-section 1256 
position will be reduced to $475 to take into account the $400 of 
unrealized gain when the section 1092(b)(2) identified mixed 
straddle was established. The $475 gain on the non-section 1256 
position will be offset by the $500 loss on the section 1256 
contract. The net loss of $25 from the straddle will be treated as 
60% long-term capital loss and 40% short-term capital loss because 
it is attributable to the section 1256 contract.

    (c) Effective/applicability date. The rules of this section apply 
to all section 1092(b)(2) identified mixed straddles established after 
August 1, 2013.
    (d) Expiration date. The applicability of this section expires on 
August 1, 2016.

Beth Tucker,
Deputy Commissioner for Operations Support.
    Approved: June 16, 2013.
Mark J. Mazur
 Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-18702 Filed 8-1-13; 8:45 am]
BILLING CODE 4830-01-P