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The potential traps for the unwary in a short-against-the-box transaction

Article Abstract:

Taxpayers generally will realize ordinary gains or losses on short sales of securities. In a short-against-the-box transaction, the investor maintains both a long and short position on the same shares by selling short shares borrowed from a dealer while retaining a long position on identical shares. IRC section 1233, which prevents the manipulation of the holding periods, can adversely affect short sellers. Investors should be wary of acquiring substantially identical stock after the short sale, since such purchases by investor or their spouses may result in unfavorable reclassification of long-term capital gains as short-term gains or of short-term losses as long-term losses.

Capital gains tax, Short selling

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Zero basis: alive but not well

Article Abstract:

Thorough reform is needed to eliminate the zero basis problem that can result in different tax treatment of economically similar transactions involving the recognition of gain on the disposition of a taxpayer's own note or stock. The more sophisticated taxpayer can plan around the zero basis problem, but requiring taxpayers to do so adds needless complexity. The better approach would be to treat the parent and subsidiary as identical for basis purposes and resolve basis and gain issue based on economic substance instead of form. Proposed revisions to relevant IRC sections are detailed.

Subsidiary corporations, Subsidiaries, Basis (Taxation)

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