Follow-up - Regulations on accounting for unrealized gain, loss on a position held before establishing a “mixed straddle” using straddle-by-straddle identification 

August 7:  Temporary regulations (T.D. 9627) and, by cross-reference, proposed regulations (REG-112815-12) published in the Federal Register on August 2 by the Treasury Department and IRS provide guidance for taxpayers electing to establish a “mixed straddle” using straddle-by-straddle identification.

The temporary regulations [PDF 206 KB] provide that unrealized gain or loss on a position held by a taxpayer prior to the time the taxpayer establishes a “mixed straddle” using straddle-by-straddle identification will be taken into account at the time and will have the character that would apply if the mixed straddle had not been established. Straddle gains and losses will be governed by the rules applicable to identified mixed straddles.

Effective date

The new rules under Reg. section 1.1092(b)-6T will apply to all section 1092(b)(2) identified mixed straddles established after August 1, 2013, regardless of when any position that is a component of the section 1092(b)(2) identified mixed straddle was purchased or otherwise acquired.* The new rule for pre-straddle gain and losses does not apply to straddles established before this date, even if the positions are still outstanding on August 2, 2013.


*For a regulation considered to be a “legislative regulation” rather than an “interpretative regulation,” the Administrative Procedure Act requires notice and procedure and a 30-day period before the published rule becomes effective, except when the agency for good cause finds and includes the finding and a brief statement of reasons with the rule that notice and public procedure and the 30-day period are impracticable, unnecessary, or contrary to the public interest. 5 U.S.C. § 553(b) and (d). Such a finding was included in the 1985 temporary regulations: “There is need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue this Treasury decision with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.” T.D. 8008, 1985-1 C.B. 276. No such finding, however, was included in the current temporary regulations. The rationale for the omission is not apparent.

Background

Section 1092(b) (as amended by the Tax Reform Act of 1984) includes an election to establish a mixed straddle using straddle-by-straddle identification—referred to as a “section 1092(b)(2) identified mixed straddle.”


Temporary and proposed regulations issued in January 1985:


  • Describe how to account for a section 1092(b)(2) identified mixed straddle, and
  • Require that unrealized gain or loss on a position that becomes a position in a section 1092(b)(2) identified mixed straddle be recognized on the day prior to establishing the section 1092(b)(2) identified mixed straddle

The rule in the 1985 regulations requiring recognition of pre-straddle gain or loss on the day prior to establishing a section 1092(b)(2) identified mixed straddle implemented a directive in the legislative history of the 1984 legislation.**


**H.R. Rep. No. 98-861, at 912 (1984) (Conf. Rep.); Staff of the Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 317 (1984).

Reason for new regulations

According to the preamble to the temporary regulations, Treasury and the IRS are aware that the existing rules arguably permit taxpayers “to selectively recognize gains and losses in inappropriate circumstances and without market constraints.”


For example, it is understood that a taxpayer could seek to use the identified mixed straddle rules in the 1985 regulations to accelerate a loss on a position that could not be marked to market or easily disposed.


Treasury and the IRS believe that Congress did not intend this result when it enacted the identified mixed straddle rules.

KPMG observation

In normal times, one would expect the tax authorities to be concerned principally with devices a taxpayer may use to accelerate losses. However, it is understood that in this era of economic distress, many taxpayers have expiring capital losses and have entered into section 1092(b)(2) identified mixed straddles with a view to recognizing gains so as, in effect, to refresh their capital losses.


It appears that Treasury and the IRS are concerned with both loss acceleration and gain acceleration.


The temporary regulations contain two examples, one dealing with a pre-straddle loss and the other with a pre-straddle gain.

Request for comment

The proposed regulations [PDF 221 KB] include a request for comments and set a due date of October 31, 2013, for such comments. Requests to speak and outlines of topics to be presented at a public hearing—set for December 4, 2013—are due on the same day as comments.




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