Accounting Periods (Portfolio 574)

Tax Management Portfolio,  Accounting Periods No. 574-3rd, discusses the tax considerations when a taxpayer adopts, or changes to, a particular taxable year.

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Tax Management Portfolio,  Accounting Periods No. 574-3rd, discusses the tax considerations when a taxpayer adopts, or changes to, a particular taxable year. Liability for federal income tax is determinable only with reference to a taxable year. Sections 441, 442, 443, and their regulations, as well as a series of comprehensive IRS Revenue Procedures, establish the basic framework for selecting and changing taxable years. In addition, Congress has adopted a number of Code provisions restricting the taxable years available to many taxpayers. These provisions serve to eliminate perceived abusive discrepancies between entities' taxable years and their owners' taxable years. This Portfolio divides the subject of taxable years into seven general areas: basic definitions relating to taxable years, restrictions on the taxable years available to numerous taxpayers, 52-53-week taxable years, the selection of an initial taxable year, the procedures for changing (and in some cases retaining) an existing taxable year, rules governing short taxable years, and rules governing a taxpayer's final taxable year. Within these areas, this Portfolio addresses these topics with respect to individuals, corporations, partnerships, and various other special entities.

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Anthony P. Polito, Professor of Law, Suffolk University Law School; S.B. (in economics), Massachusetts Institute of Technology; J.D., Harvard University; LL.M. (in taxation), New York University.


 Detailed Analysis

 I. Introduction

 A. Scope of Portfolio

 B. Overview

 II. Status of Taxpayer as Dealer, Trader, or Investor

 A. General

 1. Dealer

 a. Securities Dealer

 b. Commodities and Options Dealers

 2. Trader

 3. Investor

 III. General Description of Exchange Mechanics; Basic Tax Rules

 Introductory Material

 A. Transactions in Stock

 1. General

 2. Nonrecognition Provisions

 a. Section 1044 Election

 b. Small Business Stock

 c. Rollover of Gain into Qualified Small Business Stock

 d. Sales to Comply with Conflict-of-Interest Requirements

 B. Options

 C. Regulated Futures Contracts

 1. Definition

 2. Operation of Futures Exchanges

 3. Marking to Market

 4. Forward Sales Distinguished

 5. Futures Options

 6. Security Futures Contracts

 D. Interest Rate Instruments

 1. Treasury and Agency Issues

 2. T-Bill Futures and Options

 3. Treasury Note and Bond Futures

 4. Inflation-Index Debt Instruments

 E. Termination of Rights and Obligations: § 1234A

 IV. Wash Sales; Constructive Sales; Constructive Ownership Provisions

 A. Introduction

 B. Wash Sales

 C. Short Sale Rules

 D. Constructive Sales: § 1259

 E. Section 1260 — Constructive Ownership Provisions

 V. Straddles

 A. Introduction

 B. Straddle: Definition

 1. Position

 2. Personal Property

 3. “Substantially Similar or Related Property” (SSRP) and “Personal Property”: Regs. § 1.246-5, § 1.1092(d)-2 and Prop. Regs. § 1.1092(d)-2”

 a. Introduction

 b. Substantially Similar or Related Property (SSRP); Diminished Risk of Loss: Basic Rules

 c. Special Rules

 (1) Portfolios (Indices) Representing the Values of 20 or More Stocks

 (2) Index Positions Representing Less Than 20 Stocks

 d. Anti-abuse Rule

 e. Options, Stacking Rule, Guarantees, and Hedges

 f. Use of Related Persons or Pass-Through Entities

 g. Notional Principal Contracts

 h. Examples

 i. Prop. Regs. § 1.1092(d)-2

 C. Section 1256 Contracts Defined

 1. Regulated Futures Contract

 2. Foreign Currency Contract

 3. Nonequity Option; Dealer Equity Option

 4. Dealer Security Futures Contract

 D. The Loss Deferral Rule of § 1092(a)

 1. General: Statutory Provisions

 2. Identified Straddles

 a. Positions Established On or After October 22, 2004

 b. Positions Established On or Before October 21, 2004

 3. Qualified Covered Calls

 4. Long Stock Position and Offsetting Short Security Futures Contract

 5. Physically Settled Positions

 E. Interest and Carrying Charges

 1. Background

 2. Statutory and Other Provisions

 3. Proposed Regulations

 a. Introduction and Background

 b. The DECs Problem

 c. Contingent Payment Monetization Securities (CPMs)

 d. Legislative Proposals

 e. Proposed Regulations

 (1) Prop. Regs. § 1.1092(d)-1(d)

 (2) Prop. Regs. § § 1.263(g)-1 through 1.263(g)-5

 (3) Effective Dates

 4. Coordination with Other Code Provisions

 F. Section 1256: Mark to Market, “60/40” Rules, Hedging Exception

 1. Introduction: The Mark to Market and 60/40 Rules

 2. Additional Mark-to-Market Rules

 3. Hedging Transactions

 a. Introduction

 b. Historical Background

 (1) Treatment of Hedging Transactions Before Corn Products

 (2) The Corn Products Decision

 (3) The Corn Products Doctrine

 (4) Section 1256(e): “Hedging Transaction”

 (5) Arkansas Best

 (6) FNMA

 c. The Hedging Regulations

 (1) Introduction

 (2) General

 (3) The Character Rules: “Hedging Transaction”

 (4) Rules of Application

 (a) General

 (b) Risk Management

 (c) Risk Reducing Transactions

 (i) “Micro” and “Macro” Hedges

 (ii) Written Options

 (iii) Fixed-to-Floating Price Hedges

 (d) Other Transactions That Manage Risk

 (i) Interest Rate Conversions

 (ii) Counteractive Hedging

 (iii) Recycled Hedges

 (iv) Partial Hedges

 (v) Multiple Hedges

 (vi) Hedges of Other Risks

 (e) Transactions Not Entered to Manage Risk

 (f) Gap Hedges

 (5) Identification Requirements

 (a) Introduction

 (b) Hedging Transactions

 (c) Item(s) Hedged

 (d) Specific Situations

 (i) Anticipated Acquisition of Assets

 (ii) Purchase or Sale of Inventory

 (iii) Existing Debt of Taxpayer

 (iv) Debt to Be Issued

 (v) Aggregate Risk

 (e) How to Identify Hedging Transactions

 (f) Consistency with § 1256(e)

 (g) Failure to Identify and Inadvertent Identification

 (6) The Timing Regulations: Regs. § 1.446-4

 (a) Introduction

 (b) The Regulations: Clear Reflection of Income

 (c) Specific Assets and Liabilities

 (d) Recordkeeping Requirements

 (e) Type and Character of Income

 (7) Hedging Transactions by Consolidated Group Members

 (a) Introduction

 (b) General Rule

 (c) Separate Entity Election

 (d) Identification Requirements

 (e) Timing Provisions

 4. The Mixed Straddle Election

 G. Pre-ERTA Straddles

 H. Conversion Transactions: § 1258

 I. Security Futures Contracts

 VI. The § 1092 Regulations

 A. Introduction

 B. The § 1092(b)(1) Regulations

 1. General

 2. The Wash Sale “(a)(1)” Rule

 3. The “(a)(2)” Rules

 a. Background: Purpose of Rules

 b. Definition of Terms Used

 c. The Basic Wash Sale/Loss Deferral Rule

 (1) Illustrations

 (2) Rules Relating to Disallowed Losses

 4. Rules Based on Short Sale Principles

 a. Introduction

 b. Rules Applying § 1233(b) Principles

 c. Rules Applying § 1233(d) Principles

 d. Effective Dates

 C. The § 1092(b)(2) Regulations

 1. Introduction

 2. The “(b)(2)IMS”: Straddle by Straddle Identification Election

 a. Where All Straddle Positions Are Disposed of on Same Day

 b. Where All of the Non-§ 1256 Positions Are Disposed of on the Same Day

 c. Where All of the § 1256 Contract Positions Are Disposed of on the Same Day

 d. Where One or More, but Not All, Straddle Positions Are Disposed of on the Same Day

 e. Marking Previously Acquired Positions to Market

 f. Other Miscellaneous (b)(2)IMS Provisions

 3. The Mixed Straddle Account

 a. General

 b. Basic Rules

 c. Computing Annual Net Gain or Loss from Each Mixed Straddle Account

 d. Interest and Carrying Charge Capitalization

 e. Application of § 1092(b)(2)(B) Limitations

 D. Mixed Straddles Resulting from § 988(c)

 VII. Exotics, Notional Principal Contracts, International Aspects

 A. Introduction

 B. Notional Principal Contracts: General

 C. Interest Rate Swaps

 1. General

 2. Lump-Sum Payments: Pre-December 13, 1993 Contracts

 3. Caps, Floors and Collars

 D. International Aspects of Financial Instruments

 1. Introduction

 2. Section 988 Transactions

 a. General

 b. Hedging Transactions Other Than Notional Principal Contracts

 3. Foreign Currency Swaps

 4. Integration of Hedges and Positions Hedged

 a. General

 b. Integration Theory as Applied under § 988(d)

 (1) Statutory Authority

 (2) Nonintegrated Hedges

 (3) Initial IRS Position

 (4) Regulations

 (a) General

 (b) Tax Consequences of a Qualified Hedging Transaction: Examples and Commentary

 (c) Legging In and Out

 (d) Hedged Executory Contracts

 5. Debt-Equity Swaps and Conversions

 E. Regulations Relating to Notional Principal Contracts

 F. Conduit Transactions Using “Fast-Pay” or “Step-Down Preferred” Stock

 1. General Background

 2. Regulatory Scheme

 a. Fast-Pay Stock and Benefited Stock Defined

 b. Transactions Subject to Recharacterization

 c. Treatment of Recharacterized Transactions

 d. Disposition of Benefited Stock

 e. Anti-Abuse Rule Prohibits Affirmative Use of Recharacterization

 3. Reporting and Withholding Requirements

 a. General Reporting Requirement for Conduit Corporations

 b. Reporting Requirements for Holders of Interests in CFCs, FPHCs and PFICs

 c. Withholding Requirements

 d. Reporting Requirements for Tax Shelter Organizers and Promoters

 4. Effective Date

 5. Transitional Rules

 a. Rule of Preserving Gain from Taxable Years Ending Before February 27, 1997

 b. Election to Apply Recharacterization Model of Notice 97-21

 G. Forward-Based Products Designed as Investment Units (Feline PRIDES)

 VIII. Investment Incentives Related to Ownership of Stock

 Introductory Material

 A. Rollover of Securities Gain Upon Investment in Small Business Investment Companies

 1. Overview

 2. Sale of Publicly Traded Securities

 3. Purchase of Interest in SSBIC

 4. Computation of Gain Recognized

 a. In General

 b. Limitation on Individuals

 c. Limitation on C Corporations

 d. No Exclusion of Ordinary Income

 5. Basis of Interest in SSBIC

 a. In General

 b. Coordination with § 1202 Exclusion

 B. SBA Assistance to Small Business Investment Companies

 IX. Backup Withholding Requirements

 Introductory Material

 A. Window Transactions

 B. Sales of Securities or Commodities by Brokers

 C. Special Rules for Readily Tradable Instruments Acquired Through a Broker

 D. Special 30-day Rule for Certain Electronic Transmission Payments


 Working Papers

 Table of Worksheets

 Worksheet 1 Analysis of Currency Forwards, Futures, Options and Similar Financial Instruments

 Worksheet 2 Excerpt from IRS Publication 550 Investment Income and Expense

 Worksheet 3 How Interest Rate Swaps Can Be Used to Hedge Bond Positions.

 Worksheet 3A Sample Identification of a Hedging Transaction

 Worksheet 4 Tax Reform Act of 1976, P.L. 94–455

 Worksheet 5 Economic Recovery Tax Act of 1981, P.L. 97–34

 Worksheet 6 Technical Corrections Act of 1982, P.L. 97–448

 Worksheet 7 Tax Reform Act of 1984, P.L. 98–369

 Worksheet 8 Tax Reform Act of 1986, P.L. 99–514




 Legislative History:

 Treasury Regulations:

 Treasury Rulings:



 Joint Committee Explanations:

 Books and Pamphlets: