PUBLIC LAW 98-369—JULY 18, 1984
98 STAT. 573
PART III—MISCELLANEOUS PROVISIONS SEC. 56. DENIAL OF DEDUCTIONS FOR CERTAIN EXPENSES INCURRED IN CONNECTION WITH SHORT SALES. (a) SHORT SALE PAYMENTS ATTRIBUTABLE TO DIVIDENDS.—Section
263 (relating to capital expenditures) is amended by adding at the end thereof the following new subsection:
26 USC 263.
"(h) PAYMENTS IN LIEU OF DIVIDENDS IN CONNECTION WITH SHORT SALES.— "(1) IN GENERAL.—If—
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"(A) a taxpayer makes any payment with respect to any stock used by such taxpayer in a short sale and such payment is in lieu of a dividend payment on such stock, and "(B) the closing of such short sale occurs on or before the 45th day after the date of such short sale, then no deduction shall be allowed for such payment. The basis of the stock used to close the short sale shall be increased by the amount not allowed as a deduction by reason of the preceding sentence.
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"(2) LONGER PERIOD IN CASE OF EXTRAORDINARY DIVIDENDS.—If
the payment described in paragraph (1)(A) is in respect of an extraordinary dividend, paragraph (1)(B) shall be applied by substituting 'the day 1 year after the date of such short sale' for 'the 45th day after the date of such short sale'. "(3) EXTRAORDINARY DIVIDEND.—For purposes of this subseci tion, the term 'extraordinary dividend' has the meaning given to such term by section 1059(c); except that such section shall be applied by treating the amount realized by the taxpayer in the short sale as his adjusted basis in the stock. "(4) SPECIAL RULE WHERE RISK OF LOSS DIMINISHED.—The running of any period of time applicable under paragraph (1)(B) (as •' modified by paragraph (2)) shall be suspended during any period in which— "(A) the taxpayer holds, has an option to buy, or is under \: a contractual obligation to buy, substantially identical stock rw. H Qj. securities, or "(B) under regulations prescribed by the Secretary, a .*fO H taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or ^^.. related property. "(5) DEDUCTION ALLOWABLE TO EXTENT OF ORDINARY INCOME FROM AMOUNTS PAID BY LENDING BROKER FOR USE OF COL-
LATERAL.— "(A) IN GENERAL.—Paragraph (1) shall apply only to the extent that the payments or distributions with respect to any short sale exceed the amount which— "(i) is treated as ordinary income by the taxpayer, and "(ii) is received by the taxpayer as compensation for the use of any collateral with respect to any stock used in such short sale. "(B)
EXCEPTION NOT TO APPLY TO EXTRAORDINARY DIVI-
DENDS.—Subparagraph (A) shall not apply if one or more payments or distributions is in respect of an extraordinary dividend.
Ante, p. 565.
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