MODIFICATION OF STRADDLE RULES.

SEC. 888. MODIFICATION OF STRADDLE RULES.(a) Rules Relating to Identified Straddles.—(1) In general.—Subparagraph (A) of section 1092(a)(2) (relating to special rule for identified straddles) is amended to read as follows:“(A) In general.—In the case of any straddle which is an identified straddle—“(i) paragraph (1) shall not apply with respect to identified positions comprising the identified straddle,“(ii) if there is any loss with respect to any identified position of the identified straddle, the basis of each of the identified offsetting positions in the identified straddle shall be increased by an amount which bears the same ratio to the loss as the unrecognized gain with respect to such offsetting position bears to the aggregate unrecognized gain with respect to all such offsetting positions, and“(iii) any loss described in clause (ii) shall not otherwise be taken into account for purposes of this title.”.(2) Identified straddle.—Section 1092(a)(2)(B) (defining identified straddle) is amended—(A) by striking clause (ii) and inserting the following:“(ii) to the extent provided by regulations, the value of each position of which (in the hands of the taxpayer immediately before the creation of the straddle) is not less than the basis of such position in the hands of the taxpayer at the time the straddle is created, and”, and(B) by adding at the end the following new flush sentence:“The Secretary shall prescribe regulations which specify the proper methods for clearly identifying a straddle as an identified straddle (and the positions comprising such straddle), which specify the rules for the application of this section for a taxpayer which fails to properly identify the positions of an identified straddle, and which specify the ordering rules in cases where a taxpayer disposes of less than an entire position which is part of an identified straddle.”.(3) Unrecognized gain.—Section 1092(a)(3) (defining unrecognized gain) is amended by redesignating subparagraph (B) as subparagraph (C) and by inserting after subparagraph (A) the following new subparagraph:“(B) Special rule for identified straddles.—For purposes of paragraph (2)(A)(ii), the unrecognized gain with respect to any identified offsetting position shall be the excess of the fair market value of the position at the time of the determination over the fair market value of the position at the time the taxpayer identified the position as a position in an identified straddle.”.118 STAT. 1643(4) Conforming amendment.—Section 1092(c)(2) is amended by striking subparagraph (B) and by redesignating subparagraph (C) as subparagraph (B).(b) Physically Settled Positions.—Section 1092(d) (relating to definitions and special rules) is amended by adding at the end the following new paragraph:“(8) Special rules for physically settled positions.—For purposes of subsection (a), if a taxpayer settles a position which is part of a straddle by delivering property to which the position relates (and such position, if terminated, would result in a realization of a loss), then such taxpayer shall be treated as if such taxpayer—“(A) terminated the position for its fair market value immediately before the settlement, and“(B) sold the property so delivered by the taxpayer at its fair market value.”.(c) Repeal of Stock Exception.—(1) In general.—Paragraph (3) of section 1092(d) (relating to definitions and special rules) is amended to read as follows:“(3) Special rules for stock.—For purposes of paragraph (1)—“(A) In general.—In the case of stock, the term ‘personal property’ includes stock only if—“(i) such stock is of a type which is actively traded and at least 1 of the positions offsetting such stock is a position with respect to such stock or substantially similar or related property, or“(ii) such stock is of a corporation formed or availed of to take positions in personal property which offset positions taken by any shareholder.“(B) Rule for application.—For purposes of determining whether subsection (e) applies to any transaction with respect to stock described in subparagraph (A)(ii), all includible corporations of an affiliated group (within the meaning of section 1504(a)) shall be treated as 1 taxpayer.”.(2) Conforming amendment.—Section 1258(d)(1) is amended by striking “; except that the term ‘personal property’ shall include stock”.(d) Holding period for dividend exclusion.—The last sentence of section 246(c) is amended by inserting: “, other than a qualified covered call option to which section 1092(f) applies” before the period at the end.(e) Effective Date.—The amendments made by this section shall apply to positions established on or after the date of the enactment of this Act.