[Congressional Record Volume 148, Number 134 (Friday, October 11, 2002)]
[Extensions of Remarks]
[Page E1829]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              INTRODUCTION OF LEGISLATION ON SECTION 1032

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                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                       Thursday, October 10, 2002

  Mr. NEAL of Massachusetts. Mr. Speaker, today I am re-introducing a 
modest bill to remove incentives for corporations to bet on their own 
stock. In recent weeks, the Wall Street Journal has reported on the 
downside risk of this behavior, with several well-known and otherwise 
successful U.S. corporations forced to recognize hundreds of millions 
of dollars in losses when a stock price dramatically decreased. What 
was a successful game during the bull market, has turned into a risky 
venture in the bear market with corporations forced to buy back stock 
at prices greatly in excess of market value. A more pernicious aspect 
of this transaction is that some corporations take the `best of both 
worlds.' If they bet right and the price rises, they will pay no tax on 
the gain; if they bet wrong and it declines, they will simply deduct 
the loss.
  This legislation would apply Internal Revenue Code section 1032 to 
all derivative contracts. The impact of this change is to prohibit 
corporations from recognizing gain or loss in derivative transactions 
to the extent the derivative purchased by the corporation involves its 
own stock.
  Section 1032 states that a corporation generally does not recognize 
gain or loss on the receipt of money or other property in exchange for 
its own stock. In addition, a corporation does not recognize gain or 
loss when it redeems its own stock for cash. Section 1032, as 
originally enacted in 1954, simply recognized that there was no true 
economic gain or loss in these transactions.
  However, the 1984 Deficit Reduction Act extended this policy to 
option contracts, recognizing the potential for tax avoidance inherent 
in these contracts. Since that time, the financial industry has 
developed a number of new types of derivative products. My legislation 
merely updates current law to include in section 1032 current and 
future forms of these new types of financial instruments.
  On June 16, 1999, the Tax Section of the New York State Bar 
Association issued a report on section 1032 which recommended the 
changes discussed above. In addition, building on the work of the 
Treasury Department's budget recommendation, the Bar Association also 
recommended that Congress require a corporation that retires its stock 
and ``substantially contemporaneously'' enters into a contract to sell 
its stock forward at a fixed price, to recognize as income a time-value 
element. In effect, these two transactions provide a corporation with 
income that is economically similar to interest income but is tax-free. 
This legislation includes a provision that recognizes a time-value 
element, i.e., the version recommended by the Bar Association. The 
effective date of this legislation is for transactions entered into 
after date of enactment.
  The problem identified in 1984 and in 1999 by the Department of the 
Treasury is best described in the New York State Bar Association 
Report. The report states, ``We are concerned that all the 
inconsistencies described above (both in the general scope of section 
1032 and in its treatment of retirements combined with forward sales) 
present whipsaw and abuse potential; the government faces the risk that 
income from some transactions will not be recognized even though those 
transactions are economically equivalent to taxable transactions. In 
addition, the government faces the risk that deductions are allowed for 
losses from transactions that are equivalent in substance to 
transactions that would produce nontaxable income, or--because 
taxpayers may take different positions under current law--even in the 
same form as such transactions. To avoid these inconsistencies, we 
believe it is necessary to amend section 1032.''
  Mr. Speaker, I consider the legislation I am introducing today to be 
a normal housekeeping chore, something the Committee on Ways and Means 
has done many times in the past and hopefully will do so in the near 
future in order to preserve the original intent of the law. As such, I 
hope it will be seen both in Congress and in the industry as relatively 
noncontroversial, and that it can be added to an appropriate tax bill 
early in the next Congress. Despite the disappointing record this 
Congress has compiled to address the fallout from Enron, WorldCom, Tyco 
and other recent corporate failures, I am hopeful that the next 
Congress will quickly respond to eliminate provisions in our tax law 
encouraging such risky behavior by corporations.

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