Volume 1999    Issue 4

Toward Adding Further Complexity to the Internal Revenue Code: A New Paradigm for the Deductibility of Capital Losses

Michelle Arnopol Cecil^*

Professor Cecil, believing that the current tax treatment of capi-tal losses is fundamentally unfair and economically inefficient, offers a proposal to improve the capital loss limitation provisions of the In-ternal Revenue Code. Three tax concepts provoke the proposal: the progressivity of the current income tax structure, the notion that gains and losses are taxed only after they are realized, and the preferential treatment of capital gains. The present limitations on the deductibility of capital losses are supported in theory by three justifications: parallelism, cherrypicking, and bunching. The author argues, however, that the Code is ill-equipped to meet parallelism concerns and that cherrypicking is not a problem that a capital loss limitation scheme should address. Professor Cecil offers an alternative proposal for capital loss treatment that provides for parallel treatment of capital gains and losses by limiting the tax savings generated by capital losses to the tax rate applicable to capital gains. Professor Cecil argues that her pro-posal is superior to the current treatment of capital losses in light of fundamental fairness, economic efficiency, and political feasibility concerns. Further, the proposal benefits all taxpayers, regardless of income, and its added complexity results in fairness for all.

* Associate Professor of Law, University of Missouri-Columbia School of Law. B.A., J.D., University of Illinois. I would like to thank the Robert Maupin Faculty Research Fellowship and the Webb Gilmore Fac-ulty Research Fellowship for supporting my research for this article. I would also like to thank Molly Blackwell, Erik Edwards, and Carlos Lewis for their invaluable research assistance; Cheryl Poelling for her indispensable secretarial assistance; and Tracey George, Barbara Neilson, and Peter Wiedenbeck for their helpful comments on earlier drafts. Finally, I am grateful to Lynn Ogden, Jo Pasqualucci, and my husband Greg Cecil for their encouragement and support.