[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.165-4]

[Page 895-896]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.165-4  Decline in value of stock.

    (a) Deduction disallowed. No deduction shall be allowed under 
section 165(a) solely on account of a decline in the value of stock 
owned by the taxpayer when the decline is due to a fluctuation in the 
market price of the stock or to other similar cause. A mere shrinkage in 
the value of stock owned by the taxpayer, even though extensive, does 
not give rise to a deduction under section 165(a) if the stock has any 
recognizable value on the date claimed as the date of loss. No loss for 
a decline in the value of stock owned by the taxpayer shall be allowed 
as a deduction under

[[Page 896]]

section 165(a) except insofar as the loss is recognized under Sec. 
1.1002-1 upon the sale or exchange of the stock and except as otherwise 
provided in Sec. 1.165-5 with respect to stock which becomes worthless 
during the taxable year.
    (b) Stock owned by banks. (1) In the regulation of banks and certain 
other corporations, Federal and State authorities may require that stock 
owned by such organizations be charged off as worthless or written down 
to a nominal value. If, in any such case, this requirement is premised 
upon the worthlessness of the stock, the charging off or writing down 
will be considered prima facie evidence of worthlessness for purposes of 
section 165(a); but, if the charging off or writing down is due to a 
fluctuation in the market price of the stock or if no reasonable attempt 
to determine the worthlessness of the stock has been made, then no 
deduction shall be allowed under section 165(a) for the amount so 
charged off or written down.
    (2) This paragraph shall not be construed, however, to permit a 
deduction under section 165(a) unless the stock owned by the bank or 
other corporation actually becomes worthless in the taxable year. Such a 
taxpayer owning stock which becomes worthless during the taxable year is 
not precluded from deducting the loss under section 165(a) merely 
because, in obedience to the specific orders or general policy of such 
supervisory authorities, the value of the stock is written down to a 
nominal amount instead of being charged off completely.
    (c) Application to inventories. This section does not apply to a 
decline in the value of corporate stock reflected in inventories 
required to be taken by a dealer in securities under section 471. See 
Sec. 1.471-5.
    (d) Definition. As used in this section, the term ``stock'' means a 
share of stock in a corporation or a right to subscribe for, or to 
receive, a share of stock in a corporation.