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The Tax Court held in SIH Partners LLLP v. Commissioner (167 T.C. No. 8 (2026)) that a partnership was not entitled to qualified dividend income (QDI) treatment and foreign tax credits (FTCs) for dividends received on certain Swiss stocks because an offsetting portfolio swap diminished the partnership’s risk of loss.
Background
The partnership acquired long positions in four dividend-paying Swiss companies: Nestlé, Novartis, Roche and Swisscom (the “Swiss stocks”). At the same time, it entered into a portfolio swap with Morgan Stanley that included short positions in the same stocks, as well as short positions in an index fund and two exchange-traded funds.
For 2012, the partnership reported approximately $170.8 million of QDI and claimed $25.6 million of FTCs related to dividends from the Swiss stocks.
Holding-period rules
Sections 1(h)(11) and 901(k) generally require a taxpayer to hold the underlying stock for a minimum period to claim QDI treatment and FTCs. Both requirements incorporate the rules in Section 246(c)(4) and the regulations thereunder.
Treas. Reg. Section 1.246-5 reduces a taxpayer’s holding period for any period in which the taxpayer has diminished its risk of loss by holding one or more positions in substantially similar or related property (SSRP). For a portfolio of stocks, the regulations provide an objective “substantial overlap” test. Positions are treated as SSRP if the portfolios overlap by at least 70%. A portfolio for this purpose generally means a group of stocks from 20 or more unrelated issuers.
The regulations also include an anti-abuse rule that applies when the positions are reasonably expected to track each other, directly or inversely, and the principal purpose of the arrangement is to obtain tax benefits that significantly exceed the expected pretax economic profits.
Tax Court analysis
The court treated the swap as a portfolio position and calculated only 64% overlap between the partnership’s long and short positions. The arrangement therefore did not meet the objective 70% substantial overlap test. The court nevertheless held that the anti-abuse rule applied because the positions were expected to virtually track one another and the anticipated tax benefits significantly exceeded the expected pretax economic profits.
Although the expert testimony varied, the court found approximately $25 million of expected tax benefits compared with expected pretax economic profits ranging from $0 to $2.4 million. Accordingly, the partnership’s holding period in the Swiss stocks was reduced for the period during which it was a party to the swap, and the court denied the claimed QDI treatment and FTCs.
Grant Thornton insight:
The decision shows that satisfying an objective regulatory safe harbor may not protect an arrangement when its economic exposure is substantially offset and the expected tax benefits materially exceed the anticipated pretax return. Taxpayers using hedges, swaps or other offsetting positions around dividend-paying stock should evaluate both the mechanical overlap test and the broader anti-abuse rule when determining QDI and FTC eligibility.
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