[Federal Register Volume 79, Number 138 (Friday, July 18, 2014)]
[Rules and Regulations]
[Pages 41886-41889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17009]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9678]
RIN 1545-BK99


Mixed Straddles; Straddle-by-Straddle Identification Under 
Section 1092

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to section 
1092 identified mixed straddles established after August 18, 2014. The 
final regulations explain how to account for 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.

DATES: Effective Date: These regulations are effective on July 18, 
2014.
    Applicability Date: For the date of applicability, see Sec.  
1.1092(b)-6(e).

FOR FURTHER INFORMATION CONTACT: Pamela Lew of the Office of Associate 
Chief Counsel (Financial Institutions and Products) at (202) 317-6945 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The Deficit Reduction Act of 1984, Public Law 98-369, amended 
section 1092 of the Internal Revenue Code (Code) relating to straddles. 
As amended, section 1092(b) instructed the Treasury Department and the 
IRS to write regulations governing mixed straddles. Regulations 
governing mixed straddles were issued in 1985, including Sec.  
1.1092(b)-2T (relating to holding periods and losses with respect to 
straddle positions) and Sec.  1.1092(b)-3T (relating to mixed 
straddles) (collectively, the 1985 temporary regulations).
    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) relating to mixed straddles subject to straddle-by-straddle 
identification under section 1092(b)(2)(A)(i)(I) (identified mixed 
straddles). On August 2, 2013, the Treasury Department and the IRS 
published in the Federal Register temporary regulations relating to 
identified mixed straddles (TD 9627 at 78 FR 46807) and a notice of 
proposed rulemaking cross-referencing the temporary regulations (REG-
112815-12 at 78 FR 46854). The temporary regulations added Sec.  
1.1092(b)-6T, which provides that unrealized gain or loss on a position 
held prior to the establishment of an identified mixed straddle is 
taken into account at the time and has the character provided by 
provisions of the Code that would apply if the identified mixed 
straddle had not been established. The temporary regulations changed 
the timing of the recognition of the unrealized gain or loss as 
compared to Sec.  1.1092(b)-3T(b)(6) of the 1985 temporary regulations, 
which provides that unrealized gain or loss on a position that becomes 
a position in an identified mixed straddle is recognized on the day 
prior to establishing the identified mixed straddle.
    Section 1.1092(b)-6T applied to identified mixed straddles 
established after August 1, 2013, the date of filing of TD 9627 in the 
Federal Register. However, in response to comments raising concerns 
about the immediate applicability date of the temporary regulations, 
the regulations were corrected on October 29, 2013, to revise the 
applicability date (TD 9627 at 78 FR 64396 and REG-112815-12 at 78 FR 
64430). As corrected, Sec.  1.1092(b)-6T would apply to identified 
mixed straddles established after the date of publication of the final 
regulations in the Federal Register.
    Written comments were received on the notice of proposed rulemaking 
and a public hearing was held on December 4, 2013. All comments were 
considered and the written comments are available for public inspection 
at http://www.regulations.gov or upon request.
    After consideration of all comments, these final regulations adopt 
the provisions of the proposed regulations with certain clarifications, 
and the corresponding temporary regulations are removed. The comments 
and clarifications are discussed in this preamble.

Summary of Comments and Explanation of Revisions

    In response to the request for comments in the notice of proposed 
rulemaking, several comments were received. The comments address three 
general categories of issues: (1) the immediate applicability date of 
Sec.  1.1092(b)-6T; (2) the character mismatch and timing of gain or 
loss recognition for assets held by insurance companies; and (3) 
certain technical rules in the 1985 temporary regulations and the 
temporary regulations relating to identified mixed straddles.

1. Applicability Date

    As previously noted, in response to comments raising concerns about 
the immediate applicability date of the temporary regulations, the 
regulations were corrected on October 29, 2013, to revise the 
applicability date. As corrected, Sec.  1.1092(b)-6T would apply to 
identified mixed straddles established after the date of publication of 
final regulations in the Federal Register. The correction notices 
informed taxpayers that the Treasury Department and the IRS anticipated 
finalizing the regulations no later than June 30, 2014.
    One commenter asked that the applicability date be delayed for at 
least six months after the publication date of the final regulations in 
the Federal Register.

[[Page 41887]]

    Because the Treasury Department and the IRS believe that the 
additional time provided by the correction notices has provided 
taxpayers with ample notice, these final regulations apply to 
identified mixed straddles established after August 18, 2014.

2. Character Mismatch and Timing of Gain or Loss Recognition for Assets 
Held by Insurance Companies

    Commenters noted that insurance companies generally are buy-and-
hold investors that hold portfolio bonds to maturity absent other 
events compelling disposition. Bonds held by an insurance company are 
capital assets and the interest income generated by those assets is 
ordinary in nature. Consequently, when an insurance company sells a 
bond (sometimes pursuant to instructions from a regulator in the case 
of a bond that has deteriorated in credit quality), the sale may result 
in a capital loss that does not offset for tax purposes the ordinary 
income generated by the bond and other portfolio assets. The capital 
loss may expire unused unless the insurance company recognizes an 
offsetting capital gain. According to the commenters, the use of the 
existing regulations to generate capital gains allows an insurance 
company to avoid the transaction costs, risks of being unable to 
acquire suitable replacement property, and unfavorable accounting 
treatment associated with a sale and repurchase of appreciated bonds. 
The commenters requested that no new regulations on identified mixed 
straddles be issued because insurance companies rely on the existing 
regulations to control the timing of capital gain recognition on bonds 
in their portfolio.
    The fact that bonds generate ordinary income on periodic payments 
but capital gain or loss on disposition (when held as a capital asset) 
is not unique to insurance companies, and is a fundamental aspect of 
debt (as well as stock) investments. Section 1092 was not intended to 
alleviate character mismatches on debt portfolios. The Treasury 
Department and the IRS believe that using the section 1092(b)(2) 
identified mixed straddle rules as an alternative to selling or 
otherwise disposing of a position undermines the realization 
requirements that generally govern gain and loss recognition. These 
regulations are therefore being adopted to prevent selective 
recognition of gains and losses through the mechanism of an identified 
mixed straddle even though no disposition has occurred.

3. Technical Rules Relating to Identified Mixed Straddles

    One commenter stated that the 1985 temporary regulations do not 
define what it means for gain or loss to be ``attributable to'' a 
section 1092(b)(2) identified mixed straddle period and asked the 
Treasury Department and the IRS to modify Sec.  1.1092(b)-3T to address 
this issue. The commenter also requested an amendment to the 1985 
temporary regulations to clarify the treatment of a net loss on the 
disposition of a section 1256 contract when there is an unrecognized 
gain in the retained non-section 1256 position.
    Because these comments pertain to the operation of the 1985 
temporary regulations, they are outside the scope of the proposed 
regulations, and the Treasury Department and the IRS do not believe 
that it is appropriate to address these comments in these final 
regulations. These final regulations are intended to address only the 
time for recognizing gain or loss that has accrued up to the date a 
taxpayer enters into an identified mixed straddle. All other rules that 
apply to an identified mixed straddle under the 1985 temporary 
regulations continue to apply.
    The commenter also requested an amendment to the 1985 temporary 
regulations to clarify whether the rule in Sec.  1.1092(b)-2T(c)(2) 
that resets the holding period on positions in an identified mixed 
straddle (holding period reset rule) continues to apply under these 
regulations, even to a position that had been held for the long-term 
holding period prior to the time the identified mixed straddle was 
established. Under the holding period reset rule, when an identified 
mixed straddle is established, the holding periods of all positions in 
that identified mixed straddle are reset to zero, and a position does 
not begin to accrue holding period until it is no longer part of a 
straddle.
    This comment, requesting guidance on the holding period reset rule, 
is directly relevant to the computations required with respect to 
accrued gain or loss on a position when a taxpayer enters into an 
identified mixed straddle. Both the time period before a position 
becomes part of an identified mixed straddle and the time period after 
the identified mixed straddle is created are implicated by this 
comment. To address gain or loss that has accrued up to the day before 
a taxpayer enters into an identified mixed straddle, the text of Sec.  
1.1092(b)-6(a) has been revised and a new Example 3 in Sec.  1.1092(b)-
6(d) has been added to clarify that any gain or loss that would have 
been a long-term gain or loss under the 1985 temporary regulations 
will, when recognized, be a long-term gain or loss under these final 
regulations. To address gain or loss that accrues on or after the day a 
taxpayer enters into an identified mixed straddle, Sec.  1.1092(b)-6(b) 
expressly provides that Sec.  1.1092(b)-2T(a)(1) applies to positions 
in an identified mixed straddle. Consequently, the holding period reset 
rule in Sec.  1.1092(b)-2T(a)(1) remains applicable to gain and loss 
that accrues on or after a position becomes part of an identified mixed 
straddle. As previously noted, the holding period reset rule resets the 
holding period on positions in an identified mixed straddle to zero and 
provides that a position does not begin to accrue holding period until 
it is no longer part of a straddle.
    Finally, one commenter requested clarification as to whether 
unrecognized gain that accrued prior to a position becoming part of an 
identified mixed straddle is taken into account in determining whether 
a realized loss is deferred under section 1092(a). Section 1092(a) 
provides that any loss with respect to one or more positions shall be 
taken into account for any taxable year only to the extent that the 
amount of such loss exceeds the unrecognized gain (if any) with respect 
to one or more offsetting positions. In response to this comment, Sec.  
1.1092(b)-6(c) and a new Example 4 in Sec.  1.1092(b)-6(d) have been 
added to clarify that the rules of section 1092(a)(3)(A), which include 
realized gain in unrecognized gain, apply to an identified mixed 
straddle. Section 1092(a)(3)(B), which applies to identified straddles 
that are subject to section 1092(a)(2) and includes only gain accrued 
after the establishment of the identified straddle, does not apply to 
the section 1092(b)(2) identified mixed straddles that are the subject 
of these final regulations.

Applicability Date

    The final regulations apply to an identified mixed straddle 
established after August 18, 2014.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It has also been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations, and because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C.

[[Page 41888]]

chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the 
proposed regulations preceding these final regulations were submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on their impact on small businesses. No comments were 
received.

Drafting Information

    The principal author of these regulations is Pamela Lew, Office of 
Associate Chief Counsel (Financial Institutions and Products). However, 
other personnel from the Treasury Department and the IRS participated 
in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entries for Sec.  1.1092(b)-6T and by adding entries in numerical 
order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1092(b)-6 also issued under 26 U.S.C. 1092(b)(1).
    Section 1.1092(b)-6 also issued under 26 U.S.C. 1092(b)(2). * * 
*


0
Par. 2. Section 1.1092(b)-3T is amended by revising the paragraph 
heading and the first sentence of paragraph (b)(6) to read as follows:


Sec.  1.1092(b)-3T  Mixed straddles; straddle-by-straddle 
identification under section 1092(b)(2)(A)(i)(I) (Temporary).

* * * * *
    (b) * * *
    (6) Accrued gain and loss with respect to positions of a section 
1092(b)(2) identified mixed straddle established on or before August 
18, 2014. The rules of this paragraph (b)(6) apply to all section 
1092(b)(2) identified mixed straddles established on or before August 
18, 2014; see Sec.  1.1092(b)-6 for section 1092(b)(2) identified mixed 
straddles established after August 18, 2014. * * *
* * * * *

0
Par. 3. Section 1.1092(b)-6 is added to read as follows:


Sec.  1.1092(b)-6  Mixed straddles; accrued gain and loss associated 
with a position that becomes part of a section 1092(b)(2) identified 
mixed straddle that is established after August 18, 2014.

    (a) Treatment of unrealized gain or loss that arose before a 
position becomes part of an identified mixed straddle. Except as 
otherwise provided, if one or more positions of a straddle that is an 
identified mixed straddle described in section 1092(b)(2)(A)(i)(I) 
(identified mixed straddle) were held by the taxpayer on the day prior 
to the day the identified mixed straddle is established, any unrealized 
gain or loss on the day prior to the day the identified mixed straddle 
is established with respect to such position or positions is taken into 
account at the time, and has the character, provided by the provisions 
of the Internal Revenue Code that would apply to the gain or loss if 
the identified mixed straddle were not established. Thus, if a non-
section 1256 capital asset was held for the long-term capital gain 
holding period before the identified mixed straddle was established, 
any unrealized gain or loss on that asset on the day prior to the day 
the identified mixed straddle was established will be long-term capital 
gain or loss when that asset is sold or otherwise disposed of in a 
taxable transaction. Unrealized gain or loss on a section 1256 contract 
that accrued prior to the day the contract became part of an identified 
mixed straddle will be recognized no later than the last business day 
of the taxpayer's taxable year. For each position, unrealized gain or 
loss is the difference between the fair market value of the position at 
the close of the day before the day the identified mixed straddle is 
established and the taxpayer's basis in that position. See Sec.  
1.1092(b)-2T and paragraph (b) of this section for the treatment of 
holding periods with respect to such positions. Changes in value of the 
position or positions that occur on or after the identified mixed 
straddle is established are accounted for under the provisions of Sec.  
1.1092(b)-3T (other than Sec.  1.1092(b)-3T(b)(6)). The definitions in 
Sec.  1.1092(b)-5T apply for purposes of this section.
    (b) Holding period after a position becomes part of an identified 
mixed straddle. Section 1.1092(b)-2T(a)(1) applies to any position that 
becomes part of an identified mixed straddle, and the long-term or 
short-term character of any gain or loss on that position that arises 
on or after the day the position has become a position in an identified 
mixed straddle will be determined by beginning the taxpayer's holding 
period on the day after the identified mixed straddle ceases to exist.
    (c) Application of the loss deferral rules of section 1092(a). When 
applying section 1092(a) and Sec.  1.1092(b)-3T(b) (other than Sec.  
1.1092(b)-3T(b)(6)) to any loss that arises while a position is part of 
an identified mixed straddle, the amount of unrecognized gain includes 
both unrecognized gains described in paragraph (a) of this section that 
accrued prior to the day the identified mixed straddle is established 
and unrecognized gains that arise on or after the day the identified 
mixed straddle identification was made for the position.
    (d) Examples. The rules of this section may be illustrated by the 
following examples. It is assumed in each example that the positions 
described are the only positions held directly or indirectly (through a 
related person or flowthrough entity) by an individual calendar year 
taxpayer during the taxable year, and no successor positions are 
acquired or entered into. It is also assumed that gain or loss 
recognized on any position in the straddle would be capital gain or 
loss. The following examples assume that the identified mixed straddle 
is established after the applicability date of this section.

    Example 1. (i) Facts. On January 13, Year 1, A enters into a 
section 1256 contract. As of the close of the day on January 15, 
Year 1, there is $500 of unrealized loss on the section 1256 
contract. On January 16, Year 1, A enters into an offsetting non-
section 1256 position and makes a valid election to treat the 
straddle as an identified mixed straddle. A continues to hold both 
positions of the identified mixed straddle on January 1, Year 2, and 
there are no further changes to the value of either position in Year 
1.
    (ii) Analysis. On the last business day of Year 1, A recognizes 
the $500 loss on the section 1256 contract that accrued prior to 
establishing the identified mixed straddle because the section 1256 
contract is treated as sold on December 31, Year 1 (the last 
business day of the taxable year) under section 1256(a). The loss 
recognized in Year 1 will be treated as 60% long-term capital loss 
and 40% short-term capital loss. All gains and losses that arise on 
or after the identified mixed straddle is established are accounted 
for under the rules of Sec. Sec.  1.1092(b)-2T (and paragraph (b) of 
this section), 1.1092(b)-3T(b) (other than Sec.  1.1092(b)-
3T(b)(6)), and paragraph (c) of this section.
    Example 2. (i) Facts. On December 3, Year 1, A purchases a non-
section 1256 position for $100. As of the close of the day on 
January 22, Year 2, the non-section 1256 position has a fair market 
value of $500. On January 23, Year 2, A enters into an offsetting 
section 1256 contract and makes a valid election to treat the 
straddle as an identified mixed straddle. On February 10, Year 2, A 
closes out the section 1256 contract at a $500 loss and disposes of 
the non-section 1256 position for $975.
    (ii) Analysis of pre-straddle gain. A has $400 of unrealized 
short-term capital gain attributable to the non-section 1256 
position prior to the day the identified mixed straddle was 
established. This $400 gain is recognized on February 10, Year 2, 
when the non-section 1256 position is disposed of. Under paragraph 
(a) of this section, the gain is short-

[[Page 41889]]

term capital gain because that would have been the character of the 
gain if the non-section 1256 position had been disposed of on the 
day prior to establishing the identified mixed straddle.
    (iii) Analysis of straddle gain and loss. On February 10, Year 
2, the gain of $475 ($975 proceeds minus $500 fair market value on 
the day prior to entering into the identified mixed straddle) on the 
non-section 1256 position attributable to the identified mixed 
straddle period is offset by the $500 loss on the section 1256 
contract. The net loss of $25 from the identified mixed straddle is 
recognized and treated as 60% long-term capital loss and 40% short-
term capital loss because it is attributable to the section 1256 
contract. See Sec.  1.1092(b)-3T(b)(4).
    Example 3. (i) Facts. On January 3, Year 1, A purchases 100 
shares of Index Fund for $1,000 ($10 per share). The Index Fund 
shares are actively traded personal property and are not section 
1256 contracts. As of the close of the day on June 24, Year 2, the 
fair market value of 100 shares of Index Fund is $1,200. On June 25, 
Year 2, A enters into a short regulated futures contract (Futures 
Contract) referenced to the same index referenced by Index Fund. 
Futures Contract is a section 1256 contract and A makes a valid 
election to treat the shares of Index Fund and Futures Contract as 
an identified mixed straddle. On December 31, Year 2, the fair 
market value of A's shares of Index Fund is $1,520 and Futures 
Contract has lost $300. On January 10, Year 3, A closes out Futures 
Contract at a loss of $400 when the fair market value of 100 shares 
of Index Fund is $1,590. On November 20, Year 3, A disposes of all 
100 shares of Index Fund for $1,600.
    (ii) Year 2 analysis. On June 24, Year 2, A has held the Index 
Fund shares for longer than the long-term holding period, and the 
$200 of unrecognized gain on the Index Fund shares as of June 24, 
Year 2, will be characterized as long-term gain under paragraph (a) 
of this section when the gain is recognized. On December 31, Year 2, 
Futures Contract is marked to market under section 1256(a)(1). Under 
paragraph (a) of this section and Sec.  1.1092(b)-3T(b)(4), the loss 
on Futures Contract of $300 is netted with the $320 unrecognized 
gain on the Index Fund shares that arose while the identified mixed 
straddle was in place. Because this unrecognized gain is greater 
than the deemed realized section 1256 loss, the loss on Futures 
Contract is treated as a short-term capital loss. The loss, however, 
will be disallowed in Year 2 under paragraph (c) of this section and 
the loss deferral rules of section 1092(a) because the unrecognized 
gain in the Index Fund shares that arose while the identified mixed 
straddle was in place exceeds the deemed realized loss. Even if this 
gain were only $250 on December 31, Year 2, the deemed realized loss 
on Futures Contract would be disallowed because there is $200 of 
unrecognized gain in the Index Fund shares from the time A held the 
shares prior to establishing the identified mixed straddle.
    (iii) Year 3 analysis. When A closes out the Futures Contract on 
January 10, Year 3, the entire amount of the section 1256 $300 loss 
that was disallowed on December 31, Year 2, continues to be deferred 
under paragraph (c) of this section. On November 20, Year 3, A 
recognizes $200 long-term capital gain from the pre-identified mixed 
straddle period, and $400 short-term capital gain, $390 of which 
arose during the identified mixed straddle period and $10 of which 
arose after the identified mixed straddle was closed. See Sec.  
1.1092(b)-2T(a)(1) and paragraph (b) of this section. In Year 3, A 
recognizes the $300 short-term capital loss from Futures Contract 
disallowed in Year 2 and the $100 loss accrued on Futures Contract 
in Year 3 because A no longer holds any positions that were part of 
an identified mixed straddle.
    Example 4. (i) Facts. On March 1, Year 1, A purchases a 10-year 
U.S. Treasury Note (Note) at original issue for $100, which is the 
stated redemption price at maturity of Note. As of the close of the 
day on March 1, Year 3, Note has a fair market value of $105. On 
March 2, Year 3, A enters into a regulated futures contract (Futures 
Contract) that provides A with a short position in U.S. Treasury 
Notes and A makes a valid election to treat Note and Futures 
Contract as an identified mixed straddle. A closes her position in 
Futures Contract on April 15, Year 3, at a $2 loss. On April 15, 
Year 3, Note has a fair market value of $108. On December 31, Year 
3, Note has a fair market value of $106. A holds Note until it 
matures on February 28, Year 10.
    (ii) Year 3 analysis. A has $5 of unrealized gain attributable 
to Note prior to the day the identified mixed straddle was 
established. Because A acquired a long-term holding period in Note 
by March 1, Year 3, the $5 of gain will be characterized as long-
term capital gain under paragraph (a) of this section when it is 
recognized. Under Sec.  1.1092(b)-3T(b)(4), when A closes out 
Futures Contract on April 15, Year 3, the loss of $2 on Futures 
Contract is netted with the gain of $3 on Note that arose while the 
identified mixed straddle was in place. Because this gain on Note 
exceeds the realized loss on Futures Contract, the loss on Futures 
Contract is disallowed in Year 3 under paragraph (c) of this 
section. Further, under paragraph (c) of this section and section 
1092(a)(1), on December 31, Year 3, the disallowed loss of $2 on 
Futures Contract cannot be recognized because it is less than the 
total unrecognized gain of $6 on Note on December 31, Year 3.
    (iii) Year 10 analysis. When Note matures in Year 10, the $5 of 
unrecognized long-term capital gain that arose prior to the 
identified mixed straddle is recognized. Because A receives $100 
upon the maturity of Note, A also recognizes a $5 long-term capital 
loss on Note, for a net gain of $0 (zero). In addition, the 
termination of all positions in the identified mixed straddle 
releases the $2 loss disallowed in Year 3 on Futures Contract. The 
loss on Futures Contract is treated as short-term capital loss in 
Year 10 under Sec.  1.1092(b)-3T(b)(4).

    (e) Effective/applicability date. The rules of this section apply 
to all section 1092(b)(2) identified mixed straddles established after 
August 18, 2014.


Sec.  1.1092(b)-6T  [Removed]

0
Par. 4. Section 1.1092(b)-6T is removed.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: July 1, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-17009 Filed 7-17-14; 8:45 am]
BILLING CODE 4830-01-P