Ronald Blasi (Georgia State) has posted Proposed Regulations Perpetuate Income Distortion, 131 Tax Notes 489 (May 2, 2011), on SSRN. Here is the abstract:

This article discusses the proposal to modify regulations that determine a debt instrument’s issue price whenever there is an exchange of an instrument involving publicly traded property. Under both proposed and current regulation § 1.1273-2, the issue price of an instrument received in an exchange involving public property is equal to the fair market value of the publicly traded property. In contrast, an instrument’s issue price in an exchange involving non-publicly traded property is equal to the principal amount or stated principal amount of the debt instrument received, amounts that are unlikely to equal or approximate fair market value. The proposed regulations continue this dichotomy.

Existing regulations under 1001, not scheduled to be changed, provide that the amount realized on debt exchanges is determined by reference to the § 1273 issue price rules. By preventing the issue price of a debt instrument from being equal to fair market value of property in all cases, the plain language of § 1001 is violated, as is the fundamental principal of tax law that income be clearly reflected. This article urges the Treasury Department and the IRS to modify the proposed regulations so as to allow taxpayers to elect the use of fair market value in determining the amount realized on the exchange debt instruments not involving non-publicly traded debt property.