Current developments for straddle transactions.

• Author: Borghino, Jeff

Sec. 1092, the Sec. 1092 regulations, and Sec. 263(g) (the straddle rules) govern the taxation of straddle transactions. The straddle rules were enacted in 1981 to prevent the deferral of income and the conversion of ordinary income and short-term capital gain into long-term capital gain (Staff of the Joint Committee on Taxation, General Explanation of the Economic Recovery Tax Act of 1981 (JCS-71-81) at 283 (Dec. 29, 1981) (the 1981 Blue Book)).

While a comprehensive discussion of the straddle rules is not within the scope of this item, the straddle rules include (1) the wash-sale rule under Temp. Regs. Sec. 1.1092(b)-1T(a)(1), which is similar to the wash-sale rule of Sec. 1091 that applies to dispositions of part of a straddle; (2) the loss-deferral rule under Sec. 1092(a) and Temp. Regs. Sec. 1.1092(b)-1T(a)(2), which disallows losses related to dispositions of part of a straddle to the extent of certain unrecognized gains; (3) the holding-period rule under Temp. Regs. Sec. 1.1092(b)-2T, which suspends the holding period of a position while it is part of a straddle; and (4) Sec. 263(g), which disallows certain interest and carrying charges related to a straddle.

Kecently the IRS issued regulations clarifying (1) whether an obligor's debt could be part of a straddle (the debt-straddle regulation) and (2) the treatment of prestraddle gain or loss related to a position that is part of a "mixed straddle" as defined in Temp. Regs. Sec. 1.1092-5T(e) (the premixed straddle regulation). This item provides a brief background and summary of these regulations.

Background of the Debt-Straddle Regulation

Sec. 263(g)(1) disallows a deduction for interest and carrying charges that are properly allocable to personal property that is part of a straddle.

Sec. 263(g)(2) defines "interest and carrying charges" to mean the excess of (1) the interest related to debt that is "incurred or continued to purchase or carry the personal property" and all other amounts paid or incurred to carry the personal property over (2) certain receipts with respect to the personal property.

Sec. 263(g) does not apply to a hedging transaction as defined in Sec. 1256(e) (Sec. 263(g)(3)).

A "straddle" is defined in Sec. 1092(c) (1) as "offsetting positions with respect to personal property."

Positions are considered offsetting if there is a substantial diminution of the taxpayer's risk of loss from holding one position by reason of holding the other position (Sec. 1092(c)(2)(A)). Sec. 1092(d)(1) defines "personal property" as any personal property that is actively traded. Stock is included as personal property only if (1) the stock is actively traded and at least one of the positions offsetting the stock is a position with respect to the stock or substantially similar or related property; or (2) the stock is of a corporation formed or availed of to take positions in personal property that offset positions taken...