[Federal Register Volume 72, Number 145 (Monday, July 30, 2007)]
[Proposed Rules]
[Pages 41468-41470]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14616]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-101001-05]
RIN 1545-BE80


Abandonment of Stock and Other Securities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: These proposed regulations provide guidance concerning the 
availability and character of a loss deduction under section 165 of the 
Internal Revenue Code for losses sustained from abandoned securities. 
These proposed regulations are necessary to clarify the tax treatment 
of losses from abandoned securities and will affect any taxpayer 
claiming a deduction for a loss from abandoned securities after the 
date these regulations are published as final regulations in the 
Federal Register.

DATES: Written or electronic comments and requests for a public hearing 
must be received by October 29, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-101001-05), room 
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through

[[Page 41469]]

Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
101001-05), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, 20224, or sent electronically, via the IRS 
Internet site at http://www.irs.gov/regs or via the Federal eRulemaking 
Portal at http://www.regulations.gov (indicate IRS REG-101001-05).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Lisa S. Dobson at (202) 622-7790, or Sean M. Dwyer at (202) 622-5020; 
concerning submissions of comments and requests for a hearing, Kelly 
Banks at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    This document proposes to amend Sec.  1.165-5 of the Income Tax 
Regulations (26 CFR part 1) to provide guidance concerning the Federal 
income tax treatment of abandoned securities.

Abandonment of Securities

    Section 165(a) of the Code allows a deduction for any loss 
sustained during the taxable year and not compensated for by insurance 
or otherwise. Section 1.165-1(d)(1) of the Income Tax Regulations 
provides that a loss is treated as sustained during the taxable year in 
which the loss occurs, as evidenced by a closed and completed 
transaction, and as fixed by an identifiable event occurring in such 
taxable year.
    Section 165(g)(1) provides that, if any security that is a capital 
asset becomes worthless during the taxable year, the resulting loss is 
treated as a loss from the sale or exchange of a capital asset (that 
is, as a capital loss) on the last day of the taxable year. Section 
165(g)(2) defines security as a share of stock in a corporation; a 
right to subscribe for or to receive a share of stock in a corporation; 
or a bond, debenture, note or certificate or other evidence of 
indebtedness issued by a corporation or government with interest 
coupons or in registered form. Section 165(g)(3) provides an exception 
from capital loss treatment for certain worthless securities in a 
domestic corporation affiliated with the taxpayer.
    The legislative history of the predecessor of section 165(g) 
indicates that the provision was enacted to remove the ``peculiar and 
anomalous results'' that followed from treating losses from the 
worthlessness of securities as ordinary losses or deductions, and 
losses from the sale or exchange of securities as capital losses, 
because both losses represent a loss of capital in a transaction 
entered into for profit. See H. Rep. No. 1860, 75th Cong., 3d Sess., at 
18-19 (1938).
    The Treasury Department and the IRS understand that some taxpayers 
have taken the position that a loss under section 165(a) resulting from 
the abandonment of a security is not subject to the loss 
characterization rules provided in section 165(g).
    Property that has become worthless to the taxpayer may give rise to 
a loss deduction under section 165(a). In general, worthlessness is 
determined by a combination of subjective and objective indicia 
including a subjective determination of worthlessness to the taxpayer 
and objective evidence of a closed and completed transaction. See 
Echols v. Commissioner, 950 F.2d 209 (5th Cir. 1991); Boehm v. 
Commissioner, 326 U.S. 287 (1945). For purposes of section 165(a), the 
act of abandonment is an event that establishes both of these elements. 
Rev. Rul. 2004-58, 2004-1 CB 1043, see Sec.  601.601(d)(2)(ii)(b). 
Although an act of abandonment may be ``one of several factors in the 
analysis of whether the taxpayer's subjective determination of an 
asset's worthlessness is sustainable, abandonment is not an 
indispensable requirement for a worthlessness deduction under Code 
section 165.'' Echols, 950 F.2d at 212. Identifiable events may include 
``other acts or events which reflect the fact that the property is 
worthless.'' Proesel v. Commissioner, 77 T.C. 992, 1005 (1981).
    The proposed regulations provide that, for purposes of applying the 
loss characterization rules of section 165(g), the abandonment of a 
security establishes the worthlessness of the security to the taxpayer. 
Under the proposed regulations a loss established by the abandonment of 
a security that is a capital asset is treated as a loss from the sale 
or exchange, on the last day of the taxable year, of a capital asset, 
unless the exception in section 165(g)(3) applies. In characterizing 
losses established by the abandonment of a security in a manner 
consistent with other worthless security losses, the proposed 
regulations further the legislative intent to eliminate ``peculiar and 
anomalous results.'' See H. Rep. No. 1860, 75th Cong., 3d Sess., at 18-
19 (1938). See also Sec.  1.332-2(b) and Rev. Rul. 2003-125, 2003-2 CB 
1243, see Sec.  601.601(d)(2)(ii)(b), (wherein the character of a loss 
established in a transaction in which a shareholder disposes of stock 
and receives no consideration (specifically, a liquidation that fails 
to qualify under section 332) is prescribed by section 165(g)).
    Although a taxpayer need not relinquish legal title to property in 
all cases to establish abandonment, in view of the nature of a 
taxpayer's rights in stock and other securities these proposed 
regulations require that to abandon a security, a taxpayer must 
permanently surrender and relinquish all rights in the security and 
receive no consideration in exchange for the security.

Abandonment or Cancellation of Other Debt Instruments

    Section 166(a)(1) allows as a deduction any debt which becomes 
worthless within the taxable year. Under section 166(b), the basis for 
determining the amount of the deduction is the adjusted basis of the 
debt. Section 166(a)(2) permits a deduction for partially worthless 
debts. It provides that the Secretary, when satisfied that a debt is 
recoverable only in part, may allow a deduction for the debt in an 
amount not in excess of the part charged off within the taxable year. 
The courts have noted that the tests for worthlessness under section 
165 and under section 166 are fundamentally the same. See United States 
v. S.S. White Dental Mfg. Co., 274 U.S. 398, 401 (1927).
    A creditor may not voluntarily cancel a debt that has value and 
claim a deduction under section 166 because the debt is now valueless. 
See Jostens, Inc. v. Commissioner, 956 F.2d 175, 176-77 (8th Cir. 
1992).
    Two categories of worthless debts are excepted from section 166: 
nonbusiness debts under section 166(d) and debt securities under 
section 166(e). Under section 166(e), section 166 does not apply to a 
debt that is evidenced by a security as defined in section 
165(g)(2)(C). Accordingly, the tax treatment of debt securities is 
discussed in the Abandonment of Securities section of this preamble.
    Section 166(d)(1)(A) provides that in the case of a taxpayer other 
than a corporation, section 166(a) does not apply to a nonbusiness 
debt. Instead, under section 166(d)(1)(B), a nonbusiness debt that 
becomes worthless is considered a loss from the sale or exchange of a 
capital asset held for not more than one year. A nonbusiness debt is 
defined in section 166(d)(2) as a debt that is not created or acquired 
in connection with, or the worthlessness of which is not incurred in, 
the taxpayer's trade or business. The legislative intent behind section 
166(d) is in part to provide for parity of tax treatment with worthless 
securities

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under section 165(g) and other investments. See Putnam v. Commissioner, 
352 U.S. 82, 91-92 (1956).
    The Treasury Department and the IRS request comments concerning the 
Federal tax treatment of ``abandoned debt'' other than debt securities, 
including nonbusiness debts which, under section 166(d), are deductible 
when worthless as short-term capital losses, and other debt 
instruments, the worthlessness of which gives rise to a bad debt 
deduction under section 166(a).

Proposed Effective Date

    These proposed regulations are proposed to apply to an abandonment 
of securities occurring after the date these regulations are published 
as final regulations in the Federal Register. No inference is intended 
regarding the treatment for Federal income tax purposes of an 
abandonment of securities occurring before these regulations are 
effective.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and, because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small businesses.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The Treasury Department and the IRS specifically request 
comments on the clarity of the proposed rule and how they can be made 
easier to understand. All comments will be available for public 
inspection and copying. A public hearing will be scheduled if requested 
in writing by any person that timely submits written comments. If a 
public hearing is scheduled, notice of the date, time, and place for 
the public hearing will be published in the Federal Register.
    Although the proposed regulations provide that for purposes of 
section 165(g) the term worthless includes abandoned securities for 
which no consideration is received, there may be other contexts under 
the Code or regulations in which the tax treatment of abandoned 
securities is unclear or in which abandonment and worthlessness should 
be treated differently. In addition to comments concerning the tax 
treatment of non-security debt instruments, comments are requested 
concerning the existence and appropriate tax treatment of abandoned 
securities in other contexts.

Drafting Information

    The principal authors of these regulations are Lisa S. Dobson of 
the Office of Associate Chief Counsel (Corporate) and Sean M. Dwyer of 
the Office of Associate Chief Counsel (Income Tax and Accounting). 
Other personnel from Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.165-5 is amended as follows:
    1. Paragraph (i) is redesignated as paragraph (j).
    2. A new paragraph (i) is added.
    The addition reads as follows:


Sec.  1.165-5  Worthless securities.

* * * * *
    (i) Abandonment of securities. For purposes of section 165 and this 
section, a security that becomes wholly worthless includes a security 
described in paragraph (a) of this section that is abandoned and 
otherwise satisfies the requirements for a deductible loss under 
section 165. If the abandoned security is a capital asset and is not 
described in section 165(g)(3) and paragraph (d) of this section 
(concerning worthless securities of certain affiliated corporations), 
the resulting loss is treated as a loss from the sale or exchange, on 
the last day of the taxable year, of a capital asset. See section 
165(g)(1) and paragraph (c) of this section. To abandon a security, a 
taxpayer must permanently surrender and relinquish all rights in the 
security and receive no consideration in exchange for the security. For 
purposes of this section, all the facts and circumstances determine 
whether the transaction is properly characterized as an abandonment or 
other type of transaction, such as an actual sale or exchange, 
contribution to capital, dividend, or gift.
* * * * *

Linda E. Stiff,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-14616 Filed 7-27-07; 8:45 am]
BILLING CODE 4830-01-P