In order to protect his gain, he decides to sell 1,000 shares short against the box. He opens the short position and receives $60,000 for the short sale.
(10) Therefore, if a short against the box position is opened at a time when the fair market value is less than the investor's basis, the constructive sale rules will not apply.
enter into another short against the box transaction).
If a taxpayer owns a security (a long position), he is able to lock in the economic gain by "selling short against the box
" (selling a borrowed security), or vice versa.
Although many investors sell short against the box,(13) a variant of short selling that can defer or reduce tax liability, Estee Lauder Companies' 1995 IPO served as the impetus for the restructured assault on short sales.(14) Congress responded to the manner and degree to which the Lauders used short selling to effectuate their stock offering by passing tax legislation that treats certain financial transactions as "constructive sales" so long as those transactions function to lock in capital gain or loss with respect to the security involved.(15) The new law, codified as Internal Revenue Code section 1259, treats certain appreciated financial positions as constructive sales and taxes the capital gains on those positions.(16) This Note contends that section 1259 is flawed.
Finally, the sixth part offers a paradigm, the Related Individual--Income With Respect to a Decedent Rule, that more appropriately addresses and alleviates the abuses that can occur when particular investors sell short against the box.
Using a trust entitled the "EL 1994 Trust" as her agent, Estee Lauder borrowed 5.5 million shares of Estee Lauder Companies stock from her son, Leonard.(67) Subsequently, as part of the IPO, the Trust sold these shares short against the box to the public at an offering price of $26 per share.(68) After accounting for brokerage fees equaling $1.43 per share,(69) Estee received $24.57 per share,(70) or approximately $135 million.(71)
Short against the box. This popular strategy allows investors to raise cash for diversification and lock in a gain (or loss) without actually liquidating the stock.
If the short seller actually owns the stock but borrows it anyway, that kind of sale is called a short against the box.
Effective for constructive sales after June 8, 1997, the TRA '97 removed from sophisticated investors the tax-deferral component inherent in "selling short against the box
," futures contracts, forward contracts, equity swaps and notional principal contracts.
Thus, an investor who sells 100 shares of XYZ stock short against the box and closes the sale at a gain by delivering 100 shares of XYZ stock he has held for more than one year generally will recognize a long-term capital gain.
73-524, an individual sold 200 shares of stock short against the box. After the individual died, the individual's estate closed the short sale by delivering the individual's shares of stock to the broker.