26 U.S.C. § 1259 — Constructive sales treatment for appre-

Page 2378 TITLE 26—INTERNAL REVENUE CODE § 1259 Pub. L. 108–357, set out as a note under section 246 of this title. EFFECTIVE DATE Pub. L. 103–66, title XIII, § 13206(a)(3), Aug. 10, 1993, 107 Stat. 465, as amended by Pub. L. 104–188, title I, § 1703(n)(11), Aug. 20, 1996, 110 Stat. 1877, provided that: ‘‘The amendments made by this subsection [enacting this section] shall apply to conversion transactions en- tered into after April 30, 1993.’’ § 1259. Constructive sales treatment for appre- ciated financial positions (a) In general If there is a constructive sale of an appre- ciated financial position— (1) the taxpayer shall recognize gain as if such position were sold, assigned, or otherwise terminated at its fair market value on the date of such constructive sale (and any gain shall be taken into account for the taxable year which includes such date), and (2) for purposes of applying this title for pe- riods after the constructive sale— (A) proper adjustment shall be made in the amount of any gain or loss subsequently re- alized with respect to such position for any gain taken into account by reason of para- graph (1), and (B) the holding period of such position shall be determined as if such position were originally acquired on the date of such con- structive sale. (b) Appreciated financial position For purposes of this section— (1) In general Except as provided in paragraph (2), the term ‘‘appreciated financial position’’ means any position with respect to any stock, debt instrument, or partnership interest if there would be gain were such position sold, as- signed, or otherwise terminated at its fair market value. (2) Exceptions The term ‘‘appreciated financial position’’ shall not include— (A) any position with respect to debt if— (i) the position unconditionally entitles the holder to receive a specified principal amount, (ii) the interest payments (or other simi- lar amounts) with respect to such position meet the requirements of clause (i) of sec- tion 860G(a)(1)(B), and (iii) such position is not convertible (di- rectly or indirectly) into stock of the issuer or any related person, (B) any hedge with respect to a position described in subparagraph (A), and (C) any position which is marked to mar- ket under any provision of this title or the regulations thereunder. (3) Position The term ‘‘position’’ means an interest, in- cluding a futures or forward contract, short sale, or option. (c) Constructive sale For purposes of this section— (1) In general A taxpayer shall be treated as having made a constructive sale of an appreciated financial position if the taxpayer (or a related person)— (A) enters into a short sale of the same or substantially identical property, (B) enters into an offsetting notional prin- cipal contract with respect to the same or substantially identical property, (C) enters into a futures or forward con- tract to deliver the same or substantially identical property, (D) in the case of an appreciated financial position that is a short sale or a contract de- scribed in subparagraph (B) or (C) with re- spect to any property, acquires the same or substantially identical property, or (E) to the extent prescribed by the Sec- retary in regulations, enters into 1 or more other transactions (or acquires 1 or more po- sitions) that have substantially the same ef- fect as a transaction described in any of the preceding subparagraphs. (2) Exception for sales of nonpublicly traded property A taxpayer shall not be treated as having made a constructive sale solely because the taxpayer enters into a contract for sale of any stock, debt instrument, or partnership inter- est which is not a marketable security (as de- fined in section 453(f)) if the contract settles within 1 year after the date such contract is entered into. (3) Exception for certain closed transactions (A) In general In applying this section, there shall be dis- regarded any transaction (which would oth- erwise cause a constructive sale) during the taxable year if— (i) such transaction is closed on or before the 30th day after the close of such taxable year, (ii) the taxpayer holds the appreciated fi- nancial position throughout the 60-day pe- riod beginning on the date such trans- action is closed, and (iii) at no time during such 60-day period is the taxpayer’s risk of loss with respect to such position reduced by reason of a cir- cumstance which would be described in section 246(c)(4) if references to stock in- cluded references to such position. (B) Treatment of certain closed transactions where risk of loss on appreciated finan- cial position diminished If— (i) a transaction, which would otherwise cause a constructive sale of an appreciated financial position, is closed during the tax- able year or during the 30 days thereafter, and (ii) another transaction is entered into during the 60-day period beginning on the date the transaction referred to in clause (i) is closed— (I) which would (but for this subpara- graph) cause the requirement of subpara- graph (A)(iii) not to be met with respect Page 2379 TITLE 26—INTERNAL REVENUE CODE § 1259 to the transaction described in clause (i) of this subparagraph, (II) which is closed on or before the 30th day after the close of the taxable year in which the transaction referred to in clause (i) occurs, and (III) which meets the requirements of clauses (ii) and (iii) of subparagraph (A), the transaction referred to in clause (ii) shall be disregarded for purposes of deter- mining whether the requirements of sub- paragraph (A)(iii) are met with respect to the transaction described in clause (i). (4) Related person A person is related to another person with respect to a transaction if— (A) the relationship is described in section 267(b) or 707(b), and (B) such transaction is entered into with a view toward avoiding the purposes of this section. (d) Other definitions For purposes of this section— (1) Forward contract The term ‘‘forward contract’’ means a con- tract to deliver a substantially fixed amount of property (including cash) for a substantially fixed price. (2) Offsetting notional principal contract The term ‘‘offsetting notional principal con- tract’’ means, with respect to any property, an agreement which includes— (A) a requirement to pay (or provide credit for) all or substantially all of the invest- ment yield (including appreciation) on such property for a specified period, and (B) a right to be reimbursed for (or receive credit for) all or substantially all of any de- cline in the value of such property. (e) Special rules (1) Treatment of subsequent sale of position which was deemed sold If— (A) there is a constructive sale of any ap- preciated financial position, (B) such position is subsequently disposed of, and (C) at the time of such disposition, the transaction resulting in the constructive sale of such position is open with respect to the taxpayer or any related person, solely for purposes of determining whether the taxpayer has entered into a constructive sale of any other appreciated financial position held by the taxpayer, the taxpayer shall be treated as entering into such transaction im- mediately after such disposition. For purposes of the preceding sentence, an assignment or other termination shall be treated as a dis- position. (2) Certain trust instruments treated as stock For purposes of this section, an interest in a trust which is actively traded (within the meaning of section 1092(d)(1)) shall be treated as stock unless substantially all (by value) of the property held by the trust is debt de- scribed in subsection (b)(2)(A). (3) Multiple positions in property If a taxpayer holds multiple positions in property, the determination of whether a spe- cific transaction is a constructive sale and, if so, which appreciated financial position is deemed sold shall be made in the same manner as actual sales. (f) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section. (Added Pub. L. 105–34, title X, § 1001(a), Aug. 5, 1997, 111 Stat. 903; amended Pub. L. 105–206, title VI, § 6010(a)(1), (2), July 22, 1998, 112 Stat. 812, 813; Pub. L. 108–311, title IV, § 406(e), Oct. 4, 2004, 118 Stat. 1189.) Editorial Notes AMENDMENTS 2004—Subsec. (c)(2). Pub. L. 108–311, § 406(e)(1), sub- stituted ‘‘A taxpayer shall not be treated as having made a constructive sale solely because the taxpayer enters into a contract’’ for ‘‘The term ‘constructive sale’ shall not include any contract’’. Subsec. (c)(3)(A). Pub. L. 108–311, § 406(e)(2), sub- stituted ‘‘cause a constructive sale’’ for ‘‘be treated as a constructive sale’’ in introductory provisions. Subsec. (c)(3)(A)(i). Pub. L. 108–311, § 406(e)(3), sub- stituted ‘‘on or before’’ for ‘‘before the end of’’. Subsec. (c)(3)(B). Pub. L. 108–311, § 406(e)(7), sub- stituted ‘‘certain closed transactions where risk of loss on appreciated financial position diminished’’ for ‘‘po- sitions which are reestablished’’ in heading. Subsec. (c)(3)(B)(i). Pub. L. 108–311, § 406(e)(2), sub- stituted ‘‘cause a constructive sale’’ for ‘‘be treated as a constructive sale’’. Subsec. (c)(3)(B)(ii). Pub. L. 108–311, § 406(e)(4), struck out ‘‘substantially similar’’ after ‘‘another’’ in intro- ductory provisions. Subsec. (c)(3)(B)(ii)(I). Pub. L. 108–311, § 406(e)(5), amended subcl. (I) generally. Prior to amendment, subcl. (I) read as follows: ‘‘which also would otherwise be treated as a constructive sale of such position,’’. Subsec. (c)(3)(B)(ii)(II). Pub. L. 108–311, § 406(e)(6), in- serted ‘‘on or’’ before ‘‘before the 30th day’’. 1998—Subsec. (b)(2)(A)(i) to (iii). Pub. L. 105–206, § 6010(a)(1)(A), substituted ‘‘position’’ for ‘‘debt’’. Subsec. (b)(2)(B), (C). Pub. L. 105–206, § 6010(a)(1)(B), (C), added subpar. (B) and redesignated former subpar. (B) as (C). Subsec. (d)(1). Pub. L. 105–206, § 6010(a)(2), inserted ‘‘(including cash)’’ after ‘‘property’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–311 effective as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 406(h) of Pub. L. 108–311, set out as a note under section 55 of this title. EFFECTIVE DATE OF 1998 AMENDMENT Amendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title. EFFECTIVE DATE Section applicable to any constructive sale after June 8, 1997, with certain exceptions, see section 1001(d) of Pub. L. 105–34, set out as an Effective Date of 1997 Amendment note under section 475 of this title. Page 2380 TITLE 26—INTERNAL REVENUE CODE § 1260 § 1260. Gains from constructive ownership trans- actions (a) In general If the taxpayer has gain from a constructive ownership transaction with respect to any finan- cial asset and such gain would (without regard to this section) be treated as a long-term capital gain— (1) such gain shall be treated as ordinary in- come to the extent that such gain exceeds the net underlying long-term capital gain, and (2) to the extent such gain is treated as a long-term capital gain after the application of paragraph (1), the determination of the capital gain rate (or rates) applicable to such gain under section 1(h) shall be determined on the basis of the respective rate (or rates) that would have been applicable to the net under- lying long-term capital gain. (b) Interest charge on deferral of gain recogni- tion (1) In general If any gain is treated as ordinary income for any taxable year by reason of subsection (a)(1), the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined under paragraph (2) with respect to each prior taxable year during any portion of which the constructive owner- ship transaction was open. Any amount pay- able under this paragraph shall be taken into account in computing the amount of any de- duction allowable to the taxpayer for interest paid or accrued during such taxable year. (2) Amount of interest The amount of interest determined under this paragraph with respect to a prior taxable year is the amount of interest which would have been imposed under section 6601 on the underpayment of tax for such year which would have resulted if the gain (which is treat- ed as ordinary income by reason of subsection (a)(1)) had been included in gross income in the taxable years in which it accrued (deter- mined by treating the income as accruing at a constant rate equal to the applicable Federal rate as in effect on the day the transaction closed). The period during which such interest shall accrue shall end on the due date (without extensions) for the return of tax imposed by this chapter for the taxable year in which such transaction closed. (3) Applicable Federal rate For purposes of paragraph (2), the applicable Federal rate is the applicable Federal rate de- termined under section 1274(d) (compounded semiannually) which would apply to a debt in- strument with a term equal to the period the transaction was open. (4) No credits against increase in tax Any increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining— (A) the amount of any credit allowable under this chapter, or (B) the amount of the tax imposed by sec- tion 55. (c) Financial asset For purposes of this section— (1) In general The term ‘‘financial asset’’ means— (A) any equity interest in any pass-thru entity, and (B) to the extent provided in regulations— (i) any debt instrument, and (ii) any stock in a corporation which is not a pass-thru entity. (2) Pass-thru entity For purposes of paragraph (1), the term ‘‘pass-thru entity’’ means— (A) a regulated investment company, (B) a real estate investment trust, (C) an S corporation, (D) a partnership, (E) a trust, (F) a common trust fund, (G) a passive foreign investment company (as defined in section 1297 without regard to subsection (d) thereof), and (H) a REMIC. (d) Constructive ownership transaction For purposes of this section— (1) In general The taxpayer shall be treated as having en- tered into a constructive ownership trans- action with respect to any financial asset if the taxpayer— (A) holds a long position under a notional principal contract with respect to the finan- cial asset, (B) enters into a forward or futures con- tract to acquire the financial asset, (C) is the holder of a call option, and is the grantor of a put option, with respect to the financial asset and such options have sub- stantially equal strike prices and substan- tially contemporaneous maturity dates, or (D) to the extent provided in regulations prescribed by the Secretary, enters into one or more other transactions (or acquires one or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs. (2) Exception for positions which are marked to market This section shall not apply to any construc- tive ownership transaction if all of the posi- tions which are part of such transaction are marked to market under any provision of this title or the regulations thereunder. (3) Long position under notional principal con- tract A person shall be treated as holding a long position under a notional principal contract with respect to any financial asset if such per- son— (A) has the right to be paid (or receive credit for) all or substantially all of the in- vestment yield (including appreciation) on such financial asset for a specified period, and (B) is obligated to reimburse (or provide credit for) all or substantially all of any de- cline in the value of such financial asset.