Internal Revenue Service, Treasury § 1.1092(C)–1

Internal Revenue Service, Treasury § 1.1092(c)–1

(g) Effective date. The provisions of sections 1092(d)(4) (B) and (C) respec- this section apply to positions held on tively. or after January 1, 1984. (k) Section 1256 contract. The term section 1256 contract means a section 1256 (Secs. 1092(b)(1), 1092(b)(2) and 7805 of the In- contract as defined in section 1256(b). ternal Revenue Code of 1954 (68A Stat. 917, 98 Stat. 627; 26 U.S.C. 1092(b)(1), 1092(b)(2), 7805)) (l) [Reserved] (m) Straddle. The term straddle means [T.D. 8008, 50 FR 3329, Jan. 24, 1985; 50 FR a straddle as defined in section 12243, Mar. 28, 1985, as amended by T.D. 8058, 1092(c)(1). 50 FR 42013, Oct. 17, 1985] (n) Successor position. The term suc- § 1.1092(b)–5T Definitions (temporary). cessor position means a position (‘‘P’’) that is or was at any time offsetting to The following definitions apply for a second position if— purposes of §§ 1.1092(b)–1T through (1) The second position was offsetting 1.1092(b)–4T. to any loss position disposed of; and (a) Disposing, disposes, or disposed. The (2) P is entered into during a period term disposing, disposes, or disposed in- commencing 30 days prior to, and end- cludes the sale, exchange, cancellation, ing 30 days after, the disposition of the lapse, expiration, or other termination loss position referred to in paragraph of a right or obligation with respect to (n)(1) of this section. personal property (as defined in section (o) Unrecognized gain. The term un- 1092(d)(1)). recognized gain means unrecognized (b) Hedging transaction. The term gain as defined in section 1092(a)(3)(A). hedging transaction means a hedging (p) Substantially identical. The term transaction as defined in section substantially identical has the same 1256(e). meaning as substantially identical in (c) Identified straddle. The term identi- section 1091(a). fied straddle means an identified strad- (q) Securities. The term security means dle as defined in section 1092(a)(2)(B). a security as defined in section 1236(c). (d) Loss. The term loss means a loss (Secs. 1092(b) and 7805 of the Internal Rev- otherwise allowable under section enue Code of 1954 (68A Stat. 917, 95 Stat. 324, 165(a) (without regard to the limitation 26 U.S.C. 1092(b), 7805) and sec. 102(h) of the contained in section 165(f)) and in- Tax Reform Act of 1984 (98 Stat. 625)) cludes a write-down in inventory. [T.D. 8007, 50 FR 3321, Jan. 24, 1985, as amend- (e) Mixed straddle. The term mixed ed by T.D. 8070, 51 FR 1788, Jan. 15, 1986] straddle means a straddle— (1) All of the positions of which are § 1.1092(c)–1 Qualified covered calls. held as capital assets; (a) In general. Section 1092(c) defines (2) At least one (but not all) of the a straddle as offsetting positions with positions of which is a section 1256 con- respect to personal property. Under tract; section 1092(d)(3)(B)(i)(I), stock is per- (3) For which an election under sec- sonal property if the stock is part of a tion 1256(d) has not been made; and straddle that involves an option on (4) Which is not part of a larger that stock or substantially identical straddle. stock or securities. Under section (f) Non-section 1256 position. The term 1092(c)(4), however, writing a qualified non-section 1256 position means a posi- covered call option and owning the tion that is not a section 1256 contract. optioned stock is not treated as a (g) Offsetting position. The term offset- straddle under section 1092 if certain ting position means an offsetting posi- conditions, described in section tion as defined in section 1092(c)(2). 1092(c)(4)(B), are satisfied. Section (h) Position. The term position means 1092(c)(4)(H) authorizes the Secretary a position as defined in section to modify these conditions to carry out 1092(d)(2). the purposes of section 1092(c)(4) in (i) [Reserved] light of changes in the marketplace. (j) Related person or flowthrough enti- (b) Term limitation—(1) General rule. ty. The term related person or Except as provided in paragraph (b)(2) flowthrough entity means a related per- of this section, an option is not a quali- son or flowthrough entity as defined in fied covered call unless it is granted

231

VerDate Aug<31>2005 12:25 Apr 25, 2006 Jkt 208093 PO 00000 Frm 00241 Fmt 8010 Sfmt 8010 Y:\SGML\208093.XXX 208093 § 1.1092(c)–2 26 CFR Ch. I (4–1–06 Edition)

not more than 12 months before the section 1092(c)(4)(D), the lowest qualified day on which the option expires or sat- bench mark can be no lower than 85% of the isfies term limitation and qualified applicable stock price, which for Corporation benchmark requirements established Y stock is $12.61 (85% of the adjusted applica- by the Commissioner in guidance pub- ble stock price of $14.84). Thus, because the highest available strike price less than the lished in the Internal Revenue Bulletin adjusted applicable stock price for an equity (see § 601.601(d)(2)(ii)(b) of this chapter). option with standardized terms is lower than (2) Special benchmark rule for an option the lowest qualified bench mark under sec- granted not more than 33 months before tion 1092(c)(4)(D), the lowest strike price at the day on which the option expires—(i) which a qualified covered call option can be In general. The 12-month limitation de- written is the next higher strike price, or scribed in paragraph (b)(1) of this sec- $15.00. Therefore, a 21-month equity call option is extended to 33 months provided tion with standardized terms on Corporation the lowest qualified benchmark is de- Y stock will not be deep in the money if the termined using the adjusted applicable strike price is not less than $15. stock price, as defined in § 1.1092(c)– (c) Effective date. This section applies 4(e). to qualified covered call options en- (ii) Examples. The following examples tered into on or after July 29, 2002. illustrate the rules set out in paragraph (b)(2)(i) of this section: [67 FR 20899, Apr. 29, 2002] Example 1. Taxpayer owns stock in Cor- § 1.1092(c)–2 Equity options with flexi- poration X. Taxpayer writes an equity op- ble terms. tion with standardized terms on Corporation X stock through a national securities ex- (a) In general. Section 1092(c)(4) pro- change with a term of 21 months. The appli- vides an exception to the general rule cable stock price for Corporation X stock is that a straddle exists if a taxpayer $100. The bench marks for a 21-month equity holds stock and writes a call option on option with standardized terms with an ap- that stock. Under section 1092(c)(4), the plicable stock price of $100 will be based upon ownership of stock and the issuance of the adjusted applicable stock price. Using the table at § 1.1092(c)–4(e), the applicable a call option meeting certain require- stock price of $100 is multiplied by the ad- ments result in a qualified covered justment factor 1.12, resulting in an adjusted call, which is exempted from the gen- applicable stock price of $112. Using the eral straddle rules of section 1092. This bench marks for an equity option with section addresses the consequences of standardized terms with an adjusted applica- the availability of equity options with ble stock price of $112, the highest available flexible terms under the qualified cov- strike price less than the adjusted applicable stock price is $110, and the second highest ered call rules. strike price less than the adjusted applicable (b) No effect on lowest qualified bench stock price is $105. Therefore, a 21-month eq- mark for standardized options. The avail- uity call option with standardized terms on ability of strike prices for equity op- Corporation X stock will not be deep in the tions with flexible terms does not af- money if the strike price is not less than fect the determination of the lowest $105. Example 2. Taxpayer owns stock in Cor- qualified bench mark, as defined in sec- poration Y. Taxpayer writes an equity option 1092(c)(4)(D), for an equity option tion with standardized terms on Corporation with standardized terms. Y stock through a national securities ex- (c) Qualified covered call option sta- change with a term of 21 months. The appli- tus—(1) Requirements. An equity option cable stock price for Corporation Y stock is with flexible terms is a qualified cov- $13.25. The bench marks for a 21-month eq- ered call option only if— uity option with standardized terms with an applicable stock price of $13.25 will be based (i) The option meets the require- upon the adjusted applicable stock price. ments of section 1092(c)(4)(B) and Using the table at § 1.1092(c)–4(e), the applica- § 1.1092(c)–1 (taking into account para- ble stock price of $13.25 is multiplied by the graph (c)(2) of this section); adjustment factor 1.12, resulting in an ad- (ii) The only payments permitted justed applicable stock price of $14.84. Using with respect to the option are a single the bench marks for an equity option with standardized terms with an adjusted applica- fixed premium paid not later than 5 ble stock price of $14.84, the highest avail- business days after the day on which able strike price less than the adjusted appli- the option is granted, and a single fixed cable stock price is $12.50. However, under strike price, as defined in § 1.1092(c)–

232

VerDate Aug<31>2005 12:25 Apr 25, 2006 Jkt 208093 PO 00000 Frm 00242 Fmt 8010 Sfmt 8010 Y:\SGML\208093.XXX 208093