
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1260]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                 Subchapter P--Capital Gains and Losses
 
     PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
 
Sec. 1260. Gains from constructive ownership transactions


(a) In general

    If the taxpayer has gain from a constructive ownership transaction 
with respect to any financial 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 income 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 underlying 
    long-term capital gain.

(b) Interest charge on deferral of gain recognition

                           (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 ownership 
    transaction was open. Any amount payable under this paragraph shall 
    be taken into account in computing the amount of any deduction 
    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 
    treated as ordinary income by reason of subsection (a)(1)) had been 
    included in gross income in the taxable years in which it accrued 
    (determined 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 determined under section 1274(d) 
    (compounded semiannually) which would apply to a debt instrument 
    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 section 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 (e) thereof),
            (H) a foreign personal holding company,
            (I) a foreign investment company (as defined in section 
        1246(b)), and
            (J) a REMIC.

(d) Constructive ownership transaction

    For purposes of this section--

                           (1) In general

        The taxpayer shall be treated as having entered into a 
    constructive ownership transaction with respect to any financial 
    asset if the taxpayer--
            (A) holds a long position under a notional principal 
        contract with respect to the financial asset,
            (B) enters into a forward or futures contract 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 substantially equal strike prices and substantially 
        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 constructive ownership 
    transaction if all of the positions 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 contract

        A person shall be treated as holding a long position under a 
    notional principal contract with respect to any financial asset if 
    such person--
            (A) has the right to be paid (or receive credit for) all or 
        substantially all of the investment 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 decline in the value of such financial 
        asset.

                        (4) Forward contract

        The term ``forward contract'' means any contract to acquire in 
    the future (or provide or receive credit for the future value of) 
    any financial asset.

(e) Net underlying long-term capital gain

    For purposes of this section, in the case of any constructive 
ownership transaction with respect to any financial asset, the term 
``net underlying long-term capital gain'' means the aggregate net 
capital gain that the taxpayer would have had if--
        (1) the financial asset had been acquired for fair market value 
    on the date such transaction was opened and sold for fair market 
    value on the date such transaction was closed, and
        (2) only gains and losses that would have resulted from the 
    deemed ownership under paragraph (1) were taken into account.

The amount of the net underlying long-term capital gain with respect to 
any financial asset shall be treated as zero unless the amount thereof 
is established by clear and convincing evidence.

(f) Special rule where taxpayer takes delivery

    Except as provided in regulations prescribed by the Secretary, if a 
constructive ownership transaction is closed by reason of taking 
delivery, this section shall be applied as if the taxpayer had sold all 
the contracts, options, or other positions which are part of such 
transaction for fair market value on the closing date. The amount of 
gain recognized under the preceding sentence shall not exceed the amount 
of gain treated as ordinary income under subsection (a). Proper 
adjustments shall be made in the amount of any gain or loss subsequently 
realized for gain recognized and treated as ordinary income under this 
subsection.

(g) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this section, including 
regulations--
        (1) to permit taxpayers to mark to market constructive ownership 
    transactions in lieu of applying this section, and
        (2) to exclude certain forward contracts which do not convey 
    substantially all of the economic return with respect to a financial 
    asset.

(Added Pub. L. 106-170, title V, Sec. 534(a), Dec. 17, 1999, 113 Stat. 
1931.)


                             Effective Date

    Pub. L. 106-170, title V, Sec. 534(c), Dec. 17, 1999, 113 Stat. 
1934, provided that: ``The amendments made by this section [enacting 
this section] shall apply to transactions entered into after July 11, 
1999.''
