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3 J. Tax'n Fin. Products 41 (2002)
Dirty Linen: Airing out the Wash Sale Rules

handle is hein.journals/jrlfin3 and id is 145 raw text is: Taxation of Financial Products/Summer 2002 Dirty Linen: Airing Out the Wash Sale Rules By Lucy W Farr and Michael S. Farber 12002 L.W. Farr and M.S. Farber Lucy Farr and Michael Farber take an issue-by-issue look at the wash sale rules of Code Sec. 1091, laying out various approaches that have been suggested and the risk associated with those approaches. Suppose you're the tax director of ABC Corporation, a calendar-year taxpayer that holds a portfolio of publicly traded securities and other investment positions of various types. Suppose also that, toward year-end, your CFO comes into your office with what seems like a simple suggestion: We've recog- nized over S300 million of capital gains this year and we need to lower our effective tax rate. I've noticed that we've got significant built-in losses in a number of our positions. I'm still confident that these positions will turn around, but why don't we dispose of them in late December, and then re-en- ter them in early January? That way, the losses will shelter our capital gains this year and we effectively won't recognize those gains until we dispose of our newl\ acquired, lower-basis positions-which may be years from now. Of course, you explain that this ability to cherry-pick losses in order to defer gain recognition is precisely what Congress was concerned about in 1921 when it enacted the predecessor to the wash sale rules of Code Sec. 1091.1 Oh, yeah-those, he says. What are they, again? You pull out your copy of the Code, and read him the general rule of Code Sec. 1091 (a): In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the tax- payer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to ac- quire, substantially identical stock or securities, then no deduction shall be allowed under section 165 ... For pur- poses of this section, the term stock or securities shall, ex- cept as provided in regulations, include contracts or options to acquire or sell stock or securities.2 Lucy W Farr and Michael S. Farber are attorneys in the Tax Department of Davis Polk & Wardwell in ,Net York City.

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