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Tax News
Regulation 1.1092(d)-1(d) in Action: Per CCA 20151201F a Contingent Payment Debt is a Straddle “Position.”
March 23, 2015
Administrative Actions
This CCA 20151201F was just released and it reiterates the IRS’ longstanding position that a debt could be a “position” with respect to personal property, and therefore can be a part of a straddle, with the ultimate result of disallowing any interest deduction on the debt under IRC §263(g)(1). This is not a new position from the Service, but the ruling is notable because it appears to be the first ruling that relies on Regulation §1.1092(d)-1(d) which was promulgated in August last year.

In that past, some hedge funds would take the view that debt could be a “position” in personal property only in limited circumstances such as under IRC §1092(d)(7) which expressly provides that debt denominated in nonfunctional currency could constitute such a “position.” The arguments that taxpayers would make were along the following lines. Congress would have not enacted the narrow language in Sec. 1092(d)(7) if it intended for all debt instruments to constitute a “position.” One example of this type of an argument could be found in TAM 200541040. The IRS of course disagreed with this view even back then by basically reasoning that neither the legislative history nor the express language of IRC §1092(d)(7), indicates that Congress intended to exclude a debt instrument from the definition of “position.”

This specific issue was first addressed Prop. Regs. §1.1092(d)-1(d) which were issued in year 2001. It took the Treasury over 10 years to jump the gun and finalize the regulations, which first became temporary in year 2013 and were subsequently finalized in year 2014. Apparently, despite these regulatory developments and additional negative for the taxpayer guidance in the interim such as CCA 201310027, taxpayers continued to take the position. This is evident from the newly issued CCA 20151201F. In this CCA the taxpayer issued contingent payment debt instruments that were exchangeable for a basket of shares in specific public companies. The taxpayer proceeded to take the view that the debentures were not a part of a straddle and took a deduction for the interest on the debentures. The IRS disagreed citing the above-discussed, newly promulgated 1.1092(d)-1(d).

What is the practical implication of all of this? The practical implication is that hedge funds who participate in the type of transactions covered in the ruling (which could be found here) should take a close look at Regulation §1.1092(d)-1(d) and determine whether they are taking any inconsistent positions with this regulation. If they are, they should assess their audit and litigation hazard.
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Tags: CCA 20151201F, contingent debt straddle, position with respect to personal property, Regulation 1.1092(d)-1(d)