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BY LESLI LAFFIE

Please note: This item is from our archives and was published in 2002. It is provided for historical reference. The content may be out of date and links may no longer function.

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Short Sales
In revenue ruling 2002-44 the IRS has provided two “fact patterns” that help explain when a taxpayer realizes a gain or loss on a short sale of stock. Both examples involve a taxpayer who entered into a short sale and directed his or her broker to purchase the stock sold short and close out the sale.

In the first example, according to Treasury regulations section 1.1233-1(a)(1), the short sale is not consummated until the short seller delivers the stock to close it. While the taxpayer is treated as having acquired the stock on the trade date, he or she won’t actually deliver the stock to close the short sale until a specified date. As a result, the taxpayer doesn’t realize a loss on the transaction until that date.

In the second situation, a taxpayer constructively “sells” the short sale on December 31 of a specified year by acquiring the same or substantially identical stock as the shares underlying the short sale. Under these circumstances the taxpayer realizes gain in that year as if he or she had sold, assigned or otherwise terminated the sale at its fair market value on December 31.

Capital Asset Deemed-Sale Election
The current long-term capital gains rate is 20% for assets held for more than one year by taxpayers in the 15% or higher tax bracket. The Taxpayer Relief Act of 1997 created a reduced 18% capital gain tax rate for capital assets acquired after 2000 and held for five years. However, a taxpayer (an individual or flow-through entity) can elect to treat assets held before January 1, 2001, as sold and repurchased on that date to qualify for the 18% rate. Gain resulting from the deemed sale is subject to tax on the taxpayer’s 2001 return.

The taxpayer makes the election with the return for the period that includes January 1, 2001, either on an original or amended return filed by the extended due date (October 15 for individuals and calendar-year partnerships, limited liability companies and trusts). Once made, the election is irrevocable.

If a taxpayer has significant capital assets and is planning to hold them for more than five years, he or she ultimately may pay lower taxes by converting the 20% assets into 18% assets. The election cannot be used to recognize losses; see Notice 2002-58.

Clergy Housing Allowance
The Clergy Housing Allowance Clarification Act of 2002 says members of the clergy may exclude from income only the portion of their housing allowance equal to their residence’s fair rental value.

—Lesli Laffie, editor, The Tax Adviser.

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