[Federal Register Volume 60, Number 53 (Monday, March 20, 1995)]
[Rules and Regulations]
[Pages 14636-14641]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6693]
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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.
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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 [[Page 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 Sec. 1.246-
5(e) and Sec. 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 Sec. 1.246-5 and
Sec. 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, fixed-
term, 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
[[Page 14638]] 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
Sec. 1.1092(d)-2. The regulations provide that the definition of the
term substantially similar or related property in Sec. 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:
Sec. 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). [[Page 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. [[Page 14640]]
(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 pass-through 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 Sec. 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
Sec. 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:
------------------------------------------------------------------------
Z's
Stock holdings RFC 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
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:
------------------------------------------------------------------------
Z's 80% of
Stock holdings 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 [[Page 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
deep-in-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:
Sec. 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 Sec. 1.246-5 (other than Sec. 1.246-5(b)(3)).
The rule in Sec. 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