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ISSUE
Is a loss incurred on the abandonment or worthlessness of a partnership interest a capital or an ordinary loss?
FACTS
Situation 1. PRS is a general partnership in which A, B, and C were equal partners. During 1993, PRS became insolvent, and C abandoned C's partnership interest. C took all steps necessary to effect a proper abandonment, including written notification to PRS. PRS's partnership agreement was amended to indicate that C was no longer a partner. At the time C abandoned the partnership interest, PRS's only liabilities were nonrecourse liabilities of 120x dollars, shared equally by A, B, and C. C had a remaining adjusted basis in the partnership interest of 180x dollars. C did not receive any money or property on leaving the partnership.
Situation 2. LP is a limited partnership in which D and E were general partners and F was one of the limited partners. During 1993, LP became insolvent, and F abandoned F's limited partnership interest. F took all steps necessary to effect a proper abandonment, including written notification to LP. LP's partnership agreement was amended to indicate that F was no longer a partner. At the time F abandoned the partnership interest, F had a remaining adjusted basis of 200x dollars in the partnership interest. F did not bear the economic risk of loss for any of the partnership liabilities and was not entitled to include a share of the partnership liabilities in the basis of F's partnership interest. F did not receive any money or property on leaving the partnership.
LAW
Section 165(a) of the Internal Revenue Code allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 165(b) provides that the basis for determining the amount of a deduction for any loss is the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property. Section 1.165-1(b) of the Income Tax Regulations provides that a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the taxable year.
Section 165(f) of the Code provides that losses from sales or exchanges of capital assets are allowed only to the extent allowed in sections...