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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121258  
Subject: Re: Constructive Sale Question Date: 3/18/2000 2:36 PM
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<<Yes, another constructive sale question by me. >>

And I'll bet we'll NEVER hear from you after tax season...when we all have much more time to read, review and research these types of complicated questions...right??? :-)

<<I've read the Constructive Sale FAQs and have looked at IRS Publication 550 and can't seem to find the answer to this question.>>

There may not BE an answer...did you consider that? But let's look anyway.

<<Scenario #1:
1. I buy 100 shares of MSFT for $10000 on 12/1/1999.
2. I short against the box 100 shares of MSFT for $11000 on 12/27/1999.>>

Constructive sale...unless you beat the system.

<<3. I cover the 100 shares on 12/28/1999.>>

You beat the system...unless you violate it again.

<<4. I short against the box 100 shares of MSFT for $11000 on 12/29/1999.>>

You're in violation of the holding period rules. You've got a NEW constructive sale. The last "short and covered" sale is treated independenly for any gain or losses.

<<5. I cover the 100 shares on 1/29/2000.>>

Again, you beat the system...assuming that you comply with the holding period rules.

<<6. I hold the original 100 shares of MSFT for eternity.>>

Which means that you beat the system on the second constructive sale...at least the way I read the code section.

<<From what I understand, I would qualify for the exception to the constructive sale law in this scenario (I did enter a second offsetting position but since it qualifies for the exception, the whole series of transactions do).>>

And I would agree, based upon my reading of the code and explanations. But consider this: we could BOTH be wrong :-)

<<Scenario #2:
1. I buy 100 shares of MSFT for $10000 on 12/1/1999.
2. I short against the box 100 shares of MSFT for $11000 on 12/27/1999.>>

Constructive sale

<<3. I cover the 100 shares on 1/1/2000.>>

You beat the system...assuming you don't violate the holding period rules.

<<4. I short against the box 100 shares of MSFT for $11000 on 1/2/2000.>>

You are in violation. Constructive sale.

<<5. I cover the 100 shares on 1/29/2000.>>
6. I hold the original 100 shares of MSFT for eternity.>>

You beat the system becase you met the holding period requirements.

<<Note that the only important thing that changed is that the short sale of the second offsetting position occurs in the year 2000. Would I still qualify for the exception to constructive sale law? From reading Publication 550 literally, it seems that I would.>>

And I would agree. If you did not, example #1 would have been a constructive sale reported in 1999. Example #2 would be a constructive sale reported in 2000. But, as you have explained the two examples, it would appear that you beat the system in both cases.

<<Here is the relevant paragraph I could find in Pub. 550 (note that "(2)" and "(3)" refer to qualifications for the exception of the constructive sale law):
"If a closed transaction is reestablished in a substantially similar position during the 60-day peiod beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the end of the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true">>

Ok...

<<If I read this literally, for Scenario #2, the first hedge transaction was closed in the year 2000 (on 1/1/2000). Therefore, I actually have until 1/30/2001 to close the second short transaction!!!>>

And I agree with your interpretation. Right or wrong.

<< (I need to close the second transaction "before the end of the 30th day after the end of your tax year in which the first transaction was closed (1/1/2000)"). I'm sure my logic is flawed somewhere in here, but where?>>

I don't think so. Where you might be a little lost is that example #1 indicates a 1999 (potential)constructive sale, where example #2 indicates a 2000 (potential) constructive sale.

<<Is Scenario #2 deemed a constructive sale because the second short took place in the next year or no? If it isn't a constructive sale, then do I need to close the second transaction by 1/30/2000 or 1/30/2001?>>

You would have until 1-30-2001 if I read and understand your question correctly.

Good luck...
TMF Taxes
Roy
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