The temporary regulations [PDF 75 KB] clarify that a taxpayer’s obligation under a debt instrument can be a position in personal property that is part of a straddle; thus, these regulations primarily affect taxpayers that issue debt instruments that provide for one or more payments that reference the value of personal property or a position in personal property.
The proposed regulations [PDF 73 KB] include a request for comments and report that a hearing is scheduled for January 15, 2014.
The temporary and proposed regulations are scheduled for publication in the Federal Register on Thursday, September 5, 2013. The temporary regulations are effective on publication in the Federal Register, and will apply to straddles established on or after January 17, 2001.
In January 2001, regulations were proposed:
- To address the definition of personal property for purposes of section 263(g), the types of expenses subject to capitalization, and the operation of the capitalization rules, and
- To clarify the circumstances under which an issuer’s position under a debt instrument is treated as a position in personal property that is part of a straddle.
Today’s temporary regulations:
- Adopt the 2001 regulations—i.e., Prop. Reg. section 1.1092(d)-1(d)—in the form proposed, but now designate that provision as Reg. section 1.1092(d)-1T(d), and
- Adopt the 2001 proposed amendment to the effective / applicability dates.
The remainder of the 2001 proposed regulations, which proposed rules under section 263(g), retains the status as “proposed regulations.”
Accordingly, the preamble to today’s temporary regulations explains when, under section 1092, an issuer’s obligation under a debt instrument may be a position in actively traded personal property and, therefore, may be part of a straddle.
Section 1092(d)(1) defines “personal property” to mean “personal property of a type that is actively traded.” The preamble to today’s temporary regulations states that, although a debt or obligation generally is not property of the debtor or obligor, if a debt instrument provides for payments that are (or are reasonably expected to be) linked to the value of personal property as so defined, then the obligor on the instrument has a position in the personal property referenced by the debt instrument.
Section 1092(d)(7) provides that if a debt instrument is denominated in a nonfunctional currency, the obligor’s position under the debt obligation is a position in the nonfunctional currency. As noted in the preamble, some have maintained that section 1092(d)(7) evidences an intent by Congress to limit the circumstances in which an obligor’s interest in a debt instrument may be a position in a straddle, and that such treatment is proper only with respect to debt obligations denominated in nonfunctional currency.
Treasury and the IRS stated in the preamble to today’s temporary regulations that they do not believe that section 1092(d)(7) describes the only circumstance in which an obligor’s interest in a debt instrument may be treated as part of a straddle. It is their position that the statute and the legislative history do not contain any indication that Congress intended to limit section 1092 in this manner, but that the legislative history characterizes section 1092(d)(7) as a clarification of prior law.
The position of Treasury and the IRS is that an economic exposure associated with an obligation that is not a debt instrument (such as a written option or the obligation created by a short sale) clearly may be a straddle position. Similarly, a debt instrument may be a position in personal property and, accordingly, subject to the straddle rules, if the obligation is linked to personal property.
The temporary regulations thus expressly provide that an obligation under a debt instrument may be a position in personal property that is part of a straddle.