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ARTICLE · 19 JUNE 2001

Constructive Ownership Transactions

Goldberg Kohn
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United StatesTax

Article by Barbara Flom

Barbara M. Flom’s critique of new Code Sec. 1260 examines the adverse, overly broad federal income tax changes brought to bear upon a number of popular market investment strategies. Pending the issuance of Treasury regulations, she advises taxpayers to take special care in their recordkeeping and analysis of applicable transactions.

New Code Sec. 1260 was ushered into the Internal Revenue Code (the "Code") with remarkably little fanfare on December 17, 1999.1 In essence, it treats certain forms of derivative investments as "constructive ownership transactions" (COTs), and applies a complex and somewhat punitive income tax regime to investments in COTs. Although the provision, as enacted, has been toned down considerably from the version first proposed by former Rep. Barbara Kennelly of Connecticut back in February 1998,2 it still represents a significant adverse change to the federal income tax consequences of several popular market investment strategies.

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