The Carter administration yesterday proposed changes in tax law that would end the use of commodity transactions to avoid federal income taxes.
The changes would raise an additional $1.3 billion a year in revenue by the 1982 fiscal year, the administration estimated in its budget message.
The Carter changes would effectively outlaw tax-avoidance schemes known as "the silver butterfly" or "commodity tax straddle" and several related techniques.
It has been estimated that commodity tax-avoidance schemes cost the Treasury $3 to $4 billion a year in revenue. Closing the loophole won't produce that much additional revenue, Treasury officials concede, because many taxpayers will find other ways to avoid paying taxes.
In the budget sent to Congress yesterday, the administration estimated that wiping out commodity tax schemes would raise $100 million in additional taxes this year, $1.3 billion next year and about $1 billion a year for the foreseeable future.
The Internal Revenue Service is moving in court to end some of the artificial tax deductions and deferments of income created by the avoidance schemes, but others will require action by Congress.
Although the Carter administrtion will not be around to carry out its proposal, legislation to outlaw the butterfly, straddle and similar schemes is scheduled to be introduced next week by Reps. Benjamin Rosenthal (D-N.Y.) and William Brodhead (D-Mich.). In the Senate, Daniel Patrick Moynihan (D-N.Y.) is working on a similar bill.
Drafted in conjunction with the Treasury Department, the Rosenthal-Brodhead bill is a refinement of one introduced last summer by Rosenthal and Rep. Charles Vanik (D-Ohio.). Vanik did not seek reelection, but the measure was adopted by Brodhead, a member of the powerful House Ways and Means Committee.
Users of commodity straddles create artificial tax deductions by simultaneously buying and selling commodities for delivery at some future date. Regardless of whether the price of the commodity goes up or down, the straddle user will make money on one side of the transaction and lose the same amount on the other. The loss is deducted from income taxes, while the profit is deferred until the following year.
One version of the transaction is called a butterfly because a diagram of the deal looks like a butterfly with its wings spread. Silver is the commodity most often used in the scheme.
The administration plan to end the practice would, in effect, require taxpayers to report both the loss and the gain on commodity transactions in the same year. The bill to be introduced next week also would outlaw tax-avoidance schemes involving Treasury bill futures, foreign currencies and other commodities traded on the nation's futures market.
At his confirmation hearing earlier this month, Treasury Secretary-designate Donald T. Regan refused to endorse elimination of the deductions for commodity trading losses, but said he would study the issue.
The issue is a touchy one for Regan because the stock brokerage firm he once headed -- Merrill Lynch, Pierce, Fenner and Smith -- has been active in promoting some of the tax-avoidance techniques.