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To: Oeconomicus who wrote (4906)	6/1/1998 7:57:00 PM
From: zebraspot	Read Replies (1) \| Respond to of 164684

Bob, I hope you are right. However, last year, when the new rules came out I had a long e-talk with Roy, the tax expert over at Motley, and he was then 99% certain that puts were now also a problem vis a vis "constructive sale". I've tried to confirm it on various tax boards since, and have yet to hear anyone disagree with him. I'm attempting to confirm this again now, and will provide my findings soon. If you have any pertinent info that you can link, I'd much appreciate it.

To: Oeconomicus who wrote (4906)	6/3/1998 9:44:00 PM
From: zebraspot	Read Replies (2) \| Respond to of 164684

Follow-up on "Constructive sale" and hedging with puts: I received this update from the Motley Fool Tax Expert: >>Congress anticipates that IRS will use the authority to issue regs to treat as constructive sales other financial transactions that, like those specified in the constructive sale rules, have the effect of eliminating substantially all of the taxpayer's risk of loss and opportunity for income or gain with respect to the appreciated financial position. Because this standard requires reduction of both risk of loss and opportunity for gain, Congress intends that transactions that reduce only risk of loss or only opportunity for gain will not be covered. Thus, for example, Congress does not intend that a taxpayer who holds an appreciated financial position in stock will be treated as having made a constructive sale when the taxpayer enters into a put option with an exercise price equal to the current market price (an 'at the money' option). Because that type of option reduces only the taxpayer's risk of loss, and not its opportunity for gain, the test may not be met. For purposes of the constructive sale rules, Congress does not intend that risk of loss and opportunity for gain be considered separately. Thus, if a transaction has the effect of eliminating a portion of the taxpayer's risk of loss and a portion of the taxpayer's opportunity for gain with respect to an appreciated financial position which, taken together, are substantially all of the taxpayer's risk of loss and opportunity for gain, Congress intends that IRS regs will treat this transaction as a constructive sale of the position. Congress anticipates that IRS regs, when issued, will provide specific standards for determining whether several common transactions (such as collars and in-the-money options) will be treated as constructive sales. Collars: In a collar, a taxpayer commits to an option requiring him to sell a financial position at a fixed price (the 'call strike price') and has the right to have his position purchased at a lower fixed price (the 'put strike price'). A collar can be a single contract or can be effected by using a combination of put and call options. To determine whether collars have substantially the same effect as the transactions specified in the constructive sale rules, Congress anticipates that IRS regs will provide specific standards that take into account various factors with respect to the appreciated financial position, including its volatility. Similarly, Congress expects that several aspects of the collar transaction will be relevant, including the spread between the put and call prices, the period of the transaction, and the extent to which a taxpayer retains the right to periodic payments on the appreciated financial position (e.g., the dividends on collared stock). Congress expects that any regs with respect to collars will be applied prospectively, except in cases to prevent abuse. 'In-the-money' options: A specific regulatory standard may also be appropriate for a so-called 'in-the-money' option, i.e., a put option where the strike price is significantly above the current market price or a call option where the strike price is significantly below the current market price. For example: If a shareholder purchases a put option exercisable at a future date (a so-called "European" option) with a strike price of $120 with respect to stock currently trading at $100, the shareholder has eliminated all risk of loss on the position for the option period and assured himself of all yield and gain on the stock for any appreciation up to $120. In determining whether an 'in-the-money' option will be treated as a constructive sale, Congress anticipates that IRS regs will provide a specific standard that takes into account many of the factors described above with respect to collars, including the yield and volatility of the stock and the period and other terms of the option. Approaches IRS might adopt in regs. For collars, options, and some other transactions, one approach that IRS might take in issuing regs is to rely on option prices and option pricing models. The price of an option represents the payment the market requires to eliminate risk of loss (for a put option) and to purchase the right to receive yield and gain (for a call option). Thus, option pricing offers one model for quantifying both the total risk of loss and opportunity for gain with respect to an appreciated financial position, as well as the proportions of these total amounts that the taxpayer has retained. In addition to setting specific standards for treatment of these and other transactions, it may be appropriate for IRS regs to establish 'safe harbor' rules for common financial transactions that do not result in constructive sale treatment. An example might be a collar with a sufficient spread between the put and call prices, a sufficiently limited period and other relevant terms so that, regardless of the particular characteristics of the stock, the collar probably would not transfer substantially all risk of loss and opportunity for gain. So, as you can see, the answer is "maybe...depending upon circumstances" until such time that the IRS issues regulations regarding this issue. And those regulations aren't expected out until late this year (at the earliest) or as late as next year about this time. So we're flying blind a little bit here. All you can do is to read and try to understand the law and act (react?) accordingly. Hope this helps... TMF Taxes Roy<<