Under Code Section 165(g), when a security becomes worthless (other than a security in certain affiliated corporations), the taxpayer will be treated as having sold the security. The Code provides that this will usually result in a capital loss for the taxpayer to the extent of its adjusted basis in the security.
Taxpayers would prefer to receive an ordinary loss, since the Internal Revenue Code limits the use of long term capital losses. Some commentators have suggested that if a taxpayer "abandons" a security, it avoids the application of Code Section 165(g) and thus allows for ordinary loss treatment.
As you would expect, the IRS doesn't like that end-around the capital loss rules. After noting that Code Section 165(g) was enacted to foreclose taxpayers with worthless securities from deducting their losses as ordinary, in the Preamble to proposed regulations issued under Code Section 165(g) the IRS is asserting that the same policy is at issue with this type of "abandonment" planning. To avoid what it perceives as an incorrect result, in Proposed Regulation Sections 1.165-5(i) the IRS has indicated that an abandonment of a security will be treated the same as worthlessness, and capital loss treatment will result.
REG-101001-05, Abandonment of Stock and Other Securities., 07/27/2007