Supplemental comments on loss disallowance regulations.

• Author: Nitschke, David F.

Supplemental Comments on Loss Disallowance Regulations

I am writing to follow up on the discussion during the recent Treasury-TEI liaison meeting on the proposed loss disallowance regulations. You will recall that our meeting ended with a spirited exchange on the efficacy of a refined "tracing" regime as an alternative to the rules contained in the November 19, 1990, regulations.

Specifically, you advised us that no taxpayer, group of taxpayers, or professional or industry group had yet responded positively to Terrill Hyde's January 25, 1991, invitation for taxpayers to express a preference for a tracing system, which would apply to gains as well as losses, over the modified loss disallowance rules. After observing that tracing would produce a theoretically better and more precise result, you requested TEI's views on wether the costs of tracing would be "worth it." Stated simply, TEI believes that tax rules should be designed to reach the "right" result. Thus, to the extent that a choice is necessary, we believe tracing would be preferable.

As is clear from TEI's three sets of comments on the loss disallowance regulations,(1) the Institute does not believe the question is properly framed as either a Hobson's choice (effectively no choice because of all the conditions laden on one of the supposed alternatives) or a black-or-white proposition. The revised regulations, though marginally better than the March 1990 version, continue to deny taxpayers the ability to deduct true economic losses. They thus effectively abrogate section 165 of the Code in respect of taxpayers that elect to file consolidated returns. We believe that changes are absolutely necessary not only to vindicate the policy underlying section 165 but also to more closely effectuate Congress's intent in repealing the General Utilities doctrine. We also believe that revised rules can be crafted that achieve these goals without imposing undue burdens on either taxpayers or the Internal Revenue Service. The key to accomplishing this end lies in keeping focused on the legitimate scope of the regulations and in resisting the temptation to wield section 337(d) as a sword against perceived or chimerical abuses in subchapter C of the Code.

To summarize our previous comments, we believe that an administrable, evenhanded, and fair tracing regime can be developed. The heaviest administrative burdens would dissipate if the Treasury and IRS were to rethink their devotion to the "consumption...