Transactions in Stock, Securities and Other Financial Instruments analyzes the tax consequences of transactions involving a variety of financial instruments and products. In addition to discussing the significance of a taxpayer's status as investor, trader or dealer, this Portfolio describes the operations and tax-related issues of the stock, futures, and commodities exchanges. Written by Harrison B. McCawley, Esq. of the law firm Buchanan Ingersoll & Rooney, PC, in Washington, DC, this Portfolio  

• discusses at length the status of taxpayer as dealer, trader, or investor and provides a general description of exchange mechanics and basic tax rules
• analyzes and gives insights into wash sales, constructive sales, and constructive ownership provisions
• defines tax straddles and analyzes tax straddle rules, including §§263(g), 1092, and 1256, and applies the principles of the wash sale and short sale rules to straddle positions
• provides detailed background information and analysis on hedging transactions
• offers complete information and assessments of the §1092 Regulations 

Transactions in Stock, Securities and Other Financial Instruments also discusses §1044, which deals with the rollover of securities gain upon investment in Specialized Small Business Investment Companies. Various backup withholding requirements are described as well.  

The rules discussed in this Portfolio have two principal purposes. First, they permit the taxpayer to determine the timing and the character of gain or loss resulting from most transactions involving one or more of the financial instruments or products commonly utilized for investment, speculation, or hedging transactions. Secondly, they are designed to prevent tax abuse by the use of transactions whose principal purpose is to convert short-term gain (and, sometimes, ordinary income) to long-term gain or to convert long-term loss to short-term (or, sometimes, ordinary) loss.

Transactions in Stock, Securities and Other Financial Instruments allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more. 

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

Bibliography

OFFICIAL

Statutes:

Legislative History:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

Joint Committee Explanations:

Books and Pamphlets:

Periodicals:

Pre–1987

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

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2000

2001