FROM THE OFFICE OF PUBLIC AFFAIRS

Today the Treasury Department issued proposed regulations confirming that taxpayers cannot create tax losses in stock through certain basis-shifting transactions.  In these transactions, basis is purportedly shifted from a block of stock owned by a non-U.S. person to a block of stock owned by a U.S. taxpayer, enabling the U.S. taxpayer to claim an artificial loss on the disposition of his or her shares.  This technique purports to rely on current regulation section 1.302-2(c), which permits a "proper adjustment" to the basis of other shares of stock in cases where stock is redeemed and the proceeds of the stock redemption are treated as a dividend for federal income tax purposes.

 The proposed regulations will prevent such assertions by altering the rules that would shift basis in stock redemptions.  According to Pamela Olson, Assistant Treasury Secretary for Tax Policy, "These new regulations set forth clear rules that will prevent the claims for the shifting of basis attributable to stock that is redeemed.  The IRS currently is challenging losses claimed in a number of basis-shifting transactions.  In the meantime, the IRS and Treasury have proposed rules that prevent such assertions in the future."

The text of the proposed regulations is attached.