Daily Tax Update - September 4, 2013: Treasury and the IRS Issue Final, Temporary, Proposed Regulations on the Application of Straddle Rules

Treasury and the IRS Issue Final, Temporary, and Proposed Regulations on the Application of Straddle Rules to Debt Instruments:  Treasury and the IRS have issued final and temporary regulations (T.D. 9635) regarding the application of the straddle rules to debt instruments.  The temporary regulations clarify that a taxpayer’s obligation under a debt instrument can be a position in personal property that is part of a straddle.  The text of the temporary regulations, effective September 5, 2013, applies to straddles established on or after January 17, 2001.  The text of the temporary regulations also serves as the text of concurrently issued proposed regulations (REG-111753-12).

  • Section 1092(d)(7) explains that if a debt instrument is denominated in a nonfunctional currency, the obligor’s position under the debt obligation is a position in the nonfunctional currency. 
  • While some have claimed that section 1092(d)(7) describes the only circumstance in which an obligor’s interest in a debt instrument may be treated as part of a straddle, Treasury and the IRS disagree.  Instead, it is Treasury and the IRS’s position that “it is clear [in consideration of the statute’s legislative history] that an economic exposure associated with an obligation that is not a debt instrument (such as a written option or the obligation created by a short sale) may be a straddle position.  Similarly, a debt instrument may be a position in personal property, and accordingly subject to the straddle rules, if the obligation is linked to personal property.”
  • Thus, the temporary regulations clarify that “[i]f a taxpayer is the 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.”