The Proposal's reference to "securities" also would expand the class of instruments on which losses may be deferred to include outstanding debt instruments of the liquidating corporation. Importantly, the proposed rule only applies to losses and has no impact on gains realized under IRC Section 331. This provision would effectively eliminate taxpayers' ability to enter into so-called Granite Trust planning transactions, pursuant to which capital losses can be recognized by liquidating an insolvent subsidiary. The amendments are applicable to liquidations occurring after the date the legislation is enacted. New IRC Section 267(h) would defer that loss until the transferee corporation disposed of substantially all of the property distributed in the liquidation to a third party. The Proposal also modifies IRC Section 267 to defer recognition of any loss realized on the stock or securities of a subsidiary liquidating into its parent under IRC Section 331. Instead, any loss would be characterized as capital and as having been realized as of the day of the event establishing worthlessness under the modified rules of IRC Section 165.
The Proposal would effectively prohibit taxpayers from claiming an ordinary deduction for (i) losses with respect to debt issued in registered form by a partnership and (ii) losses arising from worthless partnership interests. The modifications would be applicable to losses arising in tax years beginning after December 31, 2021. The Proposal would modify these rules by (i) fixing the date any loss is realized as the time of the identifiable event establishing worthlessness, (ii) treating certain debt issued by a partnership as a "security" within the meaning of IRC Section 165(g)(2), and (iii) providing that a loss from a worthless partnership interest is subject to the same character rules as a loss on a sale of a partnership interest under IRC Section 741. IRC Section 165(g) generally treats a loss from a worthless security that is a capital asset as arising from the sale or exchange of a capital asset on the last day of the tax year. IRC Sections 165(g) and 267 - Modifications to treatment of certain losses
This Alert highlights the significant tax proposals impacting financial transactions and digital assets, including proposed changes to IRC Sections 165(g), 267, 871, 1091, and 1259. With important exceptions, most of these provisions would be effective for tax years beginning after December 31, 2021. Additionally, the HW&M proposal contains additional provisions with far-reaching implications. For more information on the international provisions, see Tax Alert 2021-9023. The HW&M proposal contains a proposed increase to the overall corporate tax rate to 26.5%, significant changes to the international tax landscape, and a new interest expense limitation and other corresponding rules under IRC Section 163. On September 13, 2021, the House Ways and Means Committee released the tax portion of its reconciliation bill (HW&M proposal or Proposal) and a section-by-section summary of the tax proposals, including new rules addressing financial transactions and digital assets (as defined herein).
Tax plan in House Ways & Means reconciliation bill includes several proposals that would affect financial transactions and digital assets
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