Coven asserts that one of the lingering ambiguities in subchapter C is how an appropriate tax benefit can be obtained from the tax basis that "disappears" when a shareholder's interest is completely redeemed but the transaction is treated as a dividend because stock held by others is attributed to the former shareholder. He believes that Treasury was content to rely on manifestly inadequate regulations to resolve that issue until taxpayers discovered how to convert those regulations into a potent tax shelter. The amendment to those regulations, proposed in 2002, however, was fatally flawed, according to Coven.

In this article, Coven proposes a novel solution to the disappearing basis problem that would preserve existing law for most individual taxpayers while preventing the trafficking in basis used in tax sheltering. Because the proposal relies on fundamental tax rules for its result, it renders the amendment of the regulations unnecessary.

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105 Tax Notes 1541-1548 (2004)

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