988(d) integration rule and in preventing unintended approaches to legging-out under those rules and should be adopted as final.
The final regulations substitute "treated as sold or otherwise terminated by the taxpayer for its fair market value" (emphasis added) for "treated as sold for its fair market value." The final regulations also make some other minor wording changes and update the dates in two existing examples to be consistent with the applicability date of the revised legging-out rules.
The temporary and final regulations are meant to eliminate a small loophole in the legging-out provisions of the integration regulations and should not deter taxpayers' continued use of the integration rules.
The IRS and Treasury have indicated that because the regulations do not explicitly address legging-out transactions involving multiple Regs.
The straddle rules do not prevent the recognition of the loss on the debt, however, because the legging-out regulations specifically provide that the loss is recognized at the time of the legging-out.
The temporary regulations prevent a perceived timing mismatch and tax the transaction in accordance with its economic substance by providing that the legging-out rules apply to all the positions making up the qualifying hedging transaction and by expanding (or clarifying) the application of the legging-out rules.
The temporary regulations also indicate that a partial termination of a qualifying debt instrument will trigger the legging-out rules.
The regulations appear to be a reasonable way to eliminate what may have been perceived as a small loophole in the legging-out provisions of the integration regulations.