[Code of Federal Regulations]
[Title 26, Volume 13]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR]

[Page 582-583]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Procedure and Administration--Table of Contents
 
Sec.  1.7704-3  Qualifying income.

    (a) Certain investment income--(1) In general. For purposes of 
section 7704(d)(1), qualifying income includes capital gain from the 
sale of stock, income from holding annuities, income from notional 
principal contracts (as defined in Sec.  1.446-3), and other 
substantially similar income from ordinary and routine investments to 
the extent determined by the Commissioner. Income from a notional 
principal contract is included in qualifying income only if the 
property, income, or cash flow that measures the amounts to which the 
partnership is entitled under the contract would give rise to qualifying 
income if held or received directly by the partnership.
    (2) Limitations. Qualifying income described in paragraph (a)(1) of 
this section does not include income derived in the ordinary course of a 
trade or business. For purposes of the preceding sentence, income 
derived from an asset with respect to which the partnership is a broker, 
market maker, or dealer is income derived in the ordinary course of a 
trade or business; income derived from an asset with respect to which 
the taxpayer is a trader or investor is not income derived in the 
ordinary course of a trade or business.
    (b) Calculation of gross income and qualifying income--(1) Treatment 
of losses. Except as otherwise provided in this section, in computing 
the gross income and qualifying income of a partnership for purposes of 
section 7704(c)(2) and this section, losses do not enter into the 
computation.
    (2) Certain positions that are marked to market. Gain recognized 
with respect to a position that is marked to market (for example, under 
section 475(f), 1256, 1259, or 1296) shall not fail to be qualifying 
income solely because there is no sale or disposition of the position.
    (3) Certain items of ordinary income. Gain recognized with respect 
to a capital asset shall not fail to be qualifying income solely because 
it is characterized as ordinary income under section 475(f), 988, 1258, 
or 1296.
    (4) Straddles. In computing the gross income and qualifying income 
of a partnership for purposes of section 7704(c)(2) and this section, a 
straddle (as defined in section 1092(c)) shall be treated as set forth 
in this paragraph (b)(4). For purposes of the preceding sentence, two or 
more straddles that are part of a larger straddle shall be

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treated as a single straddle. The amount of the gain from any straddle 
to be taken into account shall be computed as follows:
    (i) Straddles other than mixed straddle accounts. With respect to 
each straddle (whether or not a straddle during the taxable year) other 
than a mixed straddle account, the amount of gain taken into account 
shall be the excess, if any, of gain recognized during the taxable year 
with respect to property that was at any time a position in that 
straddle over any loss recognized during the taxable year with respect 
to property that was at any time a position in that straddle (including 
loss realized in an earlier taxable year).
    (ii) Mixed straddle accounts. With respect to each mixed straddle 
account (as defined in Sec.  1.1092(b)-4T(b)), the amount of gain taken 
into account shall be the annual account gain for that mixed straddle 
account, computed pursuant to Sec.  1.1092(b)-4T(c)(2).
    (5) Certain transactions similar to straddles. In computing the 
gross income and qualifying income of a partnership for purposes of 
section 7704(c)(2) and this section, related interests in property 
(whether or not personal property as defined in section 1092(d)(1)) that 
produce a substantial diminution of the partnership's risk of loss 
similar to that of a straddle (as defined in section 1092(c)) shall be 
combined so that the amount of gain taken into account by the 
partnership in computing its gross income shall be the excess, if any, 
of gain recognized during the taxable year with respect to such 
interests over any loss recognized during the taxable year with respect 
to such interests.
    (6) Wash sale rule--(i) Gain not taken into account. Solely for 
purposes of section 7704(c)(2) and this section, if a partnership 
recognizes gain in a section 7704 wash sale transaction with respect to 
one or more positions in either a straddle (as defined in section 
1092(c)) or an arrangement described in paragraph (b)(5) of this 
section, then the gain shall not be taken into account to the extent of 
the amount of unrecognized loss (as of the close of the taxable year) in 
one or more offsetting positions of the straddle or arrangement 
described in paragraph (b)(5) of this section.
    (ii) Section 7704 wash sale transaction. For purposes of this 
paragraph (b)(6), a section 7704 wash sale transaction is a transaction 
in which--
    (A) A partnership disposes of one or more positions of a straddle 
(as defined in section 1092(c)) or one or more related positions 
described in paragraph (b)(5) of this section; and
    (B) The partnership acquires a substantially similar position or 
positions within a period beginning 30 days before the date of the 
disposition and ending 30 days after such date.
    (c) Effective date. This section applies to taxable years of a 
partnership beginning on or after December 17, 1998. However, a 
partnership may apply this section in its entirety for all of the 
partnership's open taxable years beginning after any earlier date 
selected by the partnership.

[T.D. 8799, 63 FR 69553, Dec. 17, 1998]