7594 / When will direct ownership of stock be subject to the tax straddle rules?
In the American Jobs Creation Act of 2004, Congress repealed the pre-existing exclusion from the tax straddle rules for most direct ownership of stock. The statutory rule expands on previously proposed regulations that limited the scope of the statutory exclusion. Under the proposed regulations, personal property included any stock that is actively traded and that is part of a straddle in which at least one of the offsetting positions is a position with respect to substantially similar or related property other than stock. A position with respect to substantially similar or related property other than stock did not include direct ownership of stock or a short sale of stock, but included any other position with respect to substantially similar or related property. Thus, under the proposed regulations, stock and an equity swap with respect to property that is substantially similar or related to that stock could constitute a straddle for purposes of IRC Section 1092.3
The IRS has not yet issued any guidance on the rules, but the 2004 change eliminated the ability to hold offsetting positions in a target and an acquiring corporation’s stock without being subject to the tax straddle rules, including termination of holding periods.
Stock in a corporation that was formed or availed of to take positions in personal property that offset positions taken by shareholders of such corporation will also be subject to the straddle rules regardless of whether the stock is actively traded.4