The IRS has concluded in an internal legal memorandum (ILM
201310027) that certain debt instruments issued by a taxpayer
constituted an offsetting position in a straddle under Section 1092
and the regulations (the straddle rules).
The memorandum addressed a taxpayer who issued notes (the notes)
that were exchangeable (the exchange feature) upon demand by a
holder for certain shares of a corporation (X). X stock was
publicly traded, and the taxpayer also held a specified amount of X
stock. Immediately before the issuance of the notes, the trading
price of X stock was less than the exercise price for the exchange
feature (i.e., the exchange feature was "out of the
money").
Prior to the notes' maturity, the exchange feature became
"in-the-money" (i.e., the exercise price of the exchange
feature was less than the trading price of X stock), and the
taxpayer redeemed the notes in exchange for an amount of cash that
exceeded the adjusted issue price of the notes (the
