Tax Court Reversed on Claiming Ordinary Loss
The Court of Appeals for the Fifth Circuit has reversed the Tax Court and concluded that a taxpayer can claim an ordinary loss for abandoned securities, even though the securities were not worthless when they were abandoned and could have been sold to another party. The Appeals Court found that various tax code provisions did not apply that would have otherwise required that the transaction be treated as a capital loss (Pilgrim's Pride Corp., CA-5, February 25, 2015).
The taxpayer purchased securities for $98.6 million as security for a loan to another corporation, and then offered the securities back to the corporation for $31 million. The corporation countered with an offer of only $20 million. The taxpayer decided to abandon the securities, and claim a $98.6 million ordinary loss, rather than sell them for $20 million and claim a $78 million capital loss. The taxpayer irrevocably abandoned the securities for no consideration and claimed an ordinary loss.
Law and analysis
Code Sec. 165(g) requires capital loss treatment for a loss from worthless securities. Code Sec. 1234A mandates capital loss treatment for a loss attributable to the termination of a right with respect to a capital asset. The parties agreed that the securities were capital assets. These provisions thus treat certain transactions like a sale or exchange.
The Tax Court concluded that Code 1234A applied and required capital loss treatment. The Appeals Court found that Code Sec. 1234A does not apply to the abandonment of a capital asset. Furthermore, abandoning a capital asset without consideration is not a sale or exchange. Therefore, the taxpayer's abandonment of the securities for no consideration gave rise to an ordinary loss.