Risky and Riskless Positions In Securities

Over-the-counter derivatives are now routinely employed by sophisticated financial investors as asset management tools in much the same way that corporate issuers have used modern interest rate and currency derivative financial products to implement liability management strategies. The flexibility of derivatives allows an asset manager to concentrate his attention on those areas where his expertise provides a competitive advantage, without sacrificing the benefits of diversified market exposure. The IRS has made substantial progress in developing tax rules applicable to over-the-counter derivative financial instruments. Little of that guidance has focused on the tax issues unique to the asset side of the balance sheet. The fungibility of publicly traded securities requires a different application of tax ownership principles that is the case for nonfungible property. The ownership of publicly traded securities is determined by a formalistic inquiry, and such formalism forms a poor foundation for resolving the questions of economic risks and rewards posed by tax advisors attempting to apply Rev. Rul. 82-144 to contemporary proposals.