Par. 2. Sections 1.263(g)-1, 1.263(g)-2, 1.263(g)-3, 1.263(g)-4, and 1.263(g)-5 are added to read as follows:
(a) In general. For purposes of section 263(g), section 1092, §§ 1.263(g)-1 through 1.263(g)-5, and § 1.1092(b)-4T, interest and carrying charges properly allocable to personal property that is part of a straddle means the excess of interest and carrying charges (as defined in paragraph (b) of this section) over the allowable income offsets (as defined in paragraph (e) of this section).
(b) Interest and carrying charges. Interest and carrying charges are otherwise deductible amounts paid or accrued with respect to indebtedness or other financing incurred or continued to purchase or carry personal property that is part of a straddle and otherwise deductible amounts paid or incurred to carry personal property that is part of a straddle. As provided in section 263(g)(2), interest includes any amount paid or incurred in connection with personal property used in a short sale. Interest and carrying charges include—
(1) Otherwise deductible payments or accruals (including interest and original issue discount) on indebtedness or other financing issued or continued to purchase or carry personal property that is part of a straddle;
(2) Otherwise deductible fees or expenses paid or incurred in connection with acquiring or holding personal property that is part of a straddle including, but not limited to, fees or expenses incurred to purchase, insure, store, maintain or transport the personal property; and
(3) Other otherwise deductible payments or accruals on financial instruments that are part of a straddle or that carry part of a straddle.
(c) Indebtedness or other financing incurred or continued to purchase or carry personal property that is part of a straddle. For purposes of paragraph (b)(1) of this section, indebtedness or other financing that is incurred or continued to purchase or carry personal property that is part of a straddle includes—
(1) Indebtedness or other financing the proceeds of which are used directly or indirectly to purchase or carry personal property that is part of the straddle;
(2) Indebtedness or other financing that is secured directly or indirectly by personal property that is part of the straddle; and
(3) Indebtedness or other financing the payments on which are determined by reference to payments with respect to the personal property or the value of, or change in value of, the personal property.
(d) Financial instruments that are part of a straddle or that carry part of a straddle. For purposes of paragraph (b)(3), financial instruments that are part of a straddle or that carry part of a straddle include—
(1) A financial instrument that is part of the straddle;
(2) A financial instrument that is issued in connection with the creation or acquisition of a position in personal property if that position is part of the straddle;
(3) A financial instrument that is sold or marketed as part of an arrangement that involves a taxpayer's position in personal property that is part of the straddle and that is purported to result in either economic realization of all or part of the appreciation in an asset without simultaneous recognition of taxable income or a current tax deduction (for interest, carrying charges, payments on a notional principal contract, or otherwise) reflecting a payment or expense that is economically offset by an increase in value that is not concurrently recognized for tax purposes or has a different tax character (for example, an interest payment that is economically offset by an increase in value that may result in a capital gain in a later tax period); and
(4) Any other financial instrument if the totality of the facts and circumstances support a reasonable inference that the issuance, purchase, or continuation of the financial instrument by the taxpayer was intended to purchase or carry personal property that is part of the straddle.
(e) Allowable income offsets. The allowable income offsets are:
(1) The amount of interest (including original issue discount) includible in gross income for the taxable year with respect to such personal property;
(2) Any amount treated as ordinary income under section 1271(a)(3)(A), 1278, or 1281(a) with respect to such personal property for the taxable year;
(3) The excess of any dividends includible in gross income with respect to such property for the taxable year over the amount of any deductions allowable with respect to such dividends under section 243, 244, or 245;
(4) Any amount that is a payment with respect to a security loan (within the meaning of section 512(a)(5)) includible in income with respect to the personal property for the taxable year; and
(5) Any amount that is a receipt or accrual includible in income for the taxable year with respect to a financial instrument described in § 1.263(g)-3(d) to the extent the financial instrument is entered into to purchase or carry the personal property.