[Congressional Record (Bound Edition), Volume 145 (1999), Part 20]
[Extensions of Remarks]
[Page 29624]
[From the U.S. Government Publishing Office, www.gpo.gov]



                     EXPANSION OF IRS SECTION 1032

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                       Tuesday, November 9, 1999

  Mr. NEAL of Massachusetts. Mr. Speaker, today I am introducing a 
modest bill which builds on the recommendations of the Department of 
the Treasury and the New York State Bar Association. This legislation 
applies section 1032, which was added in 1954 to the Internal Revenue 
Code, 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 Section 1032 as originally 
enacted simply recognized that there was no true economic gain or loss 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 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 New York State 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 future. 
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 in the near future. I do hope, however, that the industries 
affected will provide written comments on technical changes they 
believe need to be addressed in this legislation as introduced, 
especially on the time value of money section of the bill.

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