## Facts

- The Progressive Corporation and Subsidiaries (“Progressive”) was a casualty insurer with its principal place of business in Ohio during the tax years 1980–1982.
- Progressive maintained an active investment portfolio and used an options-based trading strategy referred to as a “forward conversion.”
- A forward conversion consisted of three substantially contemporaneous transactions involving the same stock: (1) purchase of a block of common stock, (2) purchase of a put option on a similar quantity of that stock, and (3) sale (writing) of a call option on a similar quantity of that stock.
- The strategy hedged the stock position by giving Progressive a right to sell at a fixed price (the put) and by limiting its gain potential through the written call.
- Progressive received dividends on the underlying stock and claimed the corporate dividends-received deduction (DRD) under I.R.C. § 243.
- Section 246(c)(1)(A) required the stock to be held for more than 15 days (effectively 16 days) during the statutory window around the ex-dividend date to qualify for the DRD.
- Section 246(c)(3) provided that the holding period is reduced to zero for days on which the taxpayer has specified offsetting positions, including when the taxpayer “has an option to sell” or is “under a contractual obligation to sell” substantially identical stock.
- After audit, the IRS disallowed Progressive’s claimed DRD, asserting that § 246(c)(3) reduced Progressive’s holding period in the hedged stock to zero.
- Progressive paid the assessment and filed a refund suit in the U.S. District Court for the Northern District of Ohio (seeking, and obtaining in the district court, a refund of $2,191,595 plus interest).
- The district court granted summary judgment for Progressive, reasoning that Treas. Reg. § 1.246-3(d)(2) required an actual “short” position in the stock before § 246(c)(3) would toll the holding period.
- The United States appealed. The Sixth Circuit addressed two sets of transactions: (1) forward conversions (stock + purchased put + written call), and (2) a separate strategy in which Progressive purchased stock and simultaneously (or nearly simultaneously) sold deep in-the-money call options on that stock.

## Issues

1. Whether Progressive’s simultaneous purchase of stock and a put option on the same stock meant Progressive “has an option to sell” under I.R.C. § 246(c)(3), reducing the holding period to zero and preventing satisfaction of § 246(c)(1)(A)’s 16-day requirement for the § 243 DRD.
2. Whether Progressive’s purchase of stock and simultaneous (or nearly simultaneous) sale of deep in-the-money call options placed Progressive “under a contractual obligation to sell” within the meaning of § 246(c)(3), likewise reducing the holding period to zero and disallowing the § 243 DRD.

## Decision

- The Sixth Circuit reversed the district court’s judgment allowing DRDs for the forward conversion transactions and directed entry of summary judgment for the United States on that issue.
- The court held that when Progressive bought stock and also bought a put on the same stock, Progressive “ha[d] an option to sell” substantially identical stock within the plain text of § 246(c)(3); therefore, the holding period was reduced to zero during the put’s term and could not satisfy the 16-day requirement of § 246(c)(1)(A).
- The Sixth Circuit rejected the district court’s reading of Treas. Reg. § 1.246-3(d)(2) as imposing an actual “short sale” requirement; the statute’s express coverage of an “option to sell” controlled.
- As to the second strategy involving deep in-the-money calls, the Sixth Circuit reversed the grant of summary judgment for Progressive and remanded for the district court to determine whether those calls were “contractual obligations to sell” within § 246(c)(3).

## Legal Principles

- The corporate DRD allowed by I.R.C. § 243 applies only if the taxpayer meets the minimum holding-period requirement in I.R.C. § 246(c)(1)(A).
- Under I.R.C. § 246(c)(3), a taxpayer’s holding period in stock is reduced to zero for days when the taxpayer holds certain offsetting positions, including when the taxpayer “has an option to sell” substantially identical stock or is “under a contractual obligation to sell” it.
- A purchased put option on stock held by the taxpayer is an “option to sell” for § 246(c)(3) purposes; while that put is outstanding, the taxpayer cannot count those days toward § 246(c)(1)(A)’s holding-period minimum.
- Treasury regulations cannot be construed to narrow unambiguous statutory text; Treas. Reg. § 1.246-3(d)(2) does not add an across-the-board requirement that the taxpayer be actually short the stock before § 246(c)(3) can apply.
- Whether a written deep in-the-money call creates a “contractual obligation to sell” under § 246(c)(3) may depend on the transaction’s terms and practical operation and may require fact-finding rather than resolution on summary judgment.

## Conclusion

The Sixth Circuit held that Progressive’s forward conversion transactions failed § 246(c)’s holding-period requirement because the purchased puts were “options to sell” that reduced the holding period to zero, so the § 243 dividends-received deduction was not available for those dividends; it also reversed summary judgment on Progressive’s separate deep in-the-money call strategy and remanded for a determination whether those calls created “contractual obligations to sell” that would likewise trigger § 246(c)(3).


Progressive Corp. & Subsidiaries v. United States, 970 F.2d 188 (6th Cir. 1992)