Final rules clarify when issuer’s obligation under a debt instrument is part of a straddle

BY SALLY P. SCHREIBER, J.D.

The IRS on Tuesday provided guidance on when an issuer’s obligation under a debt instrument may be a position in actively traded personal property, in which case it can be part of a straddle. Tuesday’s final regulations (T.D. 9691) adopt without substantive change temporary and proposed regulations on the treatment of debt instruments that may be part of a straddle that were issued last September.

A straddle is defined in Sec. 1092 as offsetting positions with respect to personal property. Under the regulations, if a taxpayer is an obligor under a debt instrument, one or more payments on which are linked to the value of personal property or a position with respect to personal property, then the taxpayer’s obligation under the debt instrument is a position with respect to personal property and may be part of a straddle.

These final regulations apply to straddles established on or after Jan. 17, 2001, the date the first proposed regulations were published in the Federal Register, and remove the temporary regulations issued last year (T.D. 9635). In the preamble to the regulations, the IRS noted that, although Regs. Sec. 1.1092(d)-1(d) does not apply to straddles established before Jan. 17, 2001, “[i]n appropriate cases, the IRS may take the position under section 1092(d)(2) that an obligation under a debt instrument was part of a straddle prior to the effective/applicability date of §1.1092(d)-1(d) if the debt instrument functioned economically as an interest in actively traded personal property.”

Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.

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