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No Ordinary Loss Deduction for Abandonment of Securities.
(Parker Tax Publishing December 2013)
Because securities held by the taxpayer were intangible property that comprised the rights the taxpayer had in the management, profits, and assets of the company issuing the securities, the termination of those rights by abandoning the securities was a capital loss, not an ordinary loss. Pilgrim's Pride Corporation v. Comm'r, 141 T.C. No. 17 (12/11/13).
Pilgrim's Pride Corporation is the successor in interest to Gold Kist, Inc., an association taxed as a nonexempt cooperative. In 1999, Gold Kist was contractually obligated to purchase, and did purchase, securities from Southern States Cooperative, Inc., and Southern States Capital Trust I (Southern States). The purchase price was $98.6 million. The securities were capital assets of Gold Kist. The securities generally provided for quarterly dividend payments that, under certain circumstances, could be unilaterally deferred by Southern States.
Southern States stopped paying, and began deferring, the quarterly dividends payable on certain securities beginning with the April 2002 quarterly dividend. Later that year, Southern States notified Gold Kist that the quarterly dividends on other securities for that quarter and subsequent quarters would not be paid. In 2004, Southern States offered to redeem the securities for $20 million. Gold Kist's board of directors decided to abandon the securities for no consideration because a $98.6 million ordinary loss would produce greater tax savings than the $20 million offered by Southern States. Thus, in 2004, Gold Kist voluntarily surrendered the securities to Southern States for no consideration. On its 2004 federal income tax return, Gold Kist reported a $98.6 million ordinary abandonment loss deduction under Code Sec. 165(a) and Reg. Sec. 1.165-2(a).
Under Code Sec. 165(a) and Reg. Sec. 1.165-2(a), an abandonment loss deduction can be taken for a loss incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in such business or transaction of nondepreciable property. The loss is allowable where a business or transaction is discontinued or where such property is permanently discarded from use. The loss is taken as a deduction for the tax year in which the loss is actually sustained. However, under Reg. Sec. 1.165-2(b), an abandonment loss cannot be claimed on a sale or exchange of property. Under Code Sec. 165(f), losses from sales or exchanges of capital assets are subject to the limitations on capital losses. Further, Code Sec. 1234A requires gain or loss attributable to the cancellation, lapse, expiration, or other termination of a right with respect to property that is (or on acquisition would be) a capital asset in the hands of a taxpayer to be treated as gain or loss from the sale of a capital asset.
The Tax Court held that the securities were intangible property comprising rights that Gold Kist had in the management, profits, and assets of Southern States. Those rights were terminated, the court stated, when Gold Kist surrendered the securities. According to the court, the $98.6 million loss on the surrender of the securities was attributable to the termination of Gold Kist's rights with respect to the securities, which were capital assets. Further, the court stated, under Code Sec. 1234A, the loss is a loss from the sale or exchange of capital assets. The court concluded that Gold Kist was not entitled to an ordinary loss deduction for abandonment because the loss is treated as a loss from the sale or exchange of capital assets under Code Sec. 1234A. Finally, the court held that, under Code Sec. 165(f), Pilgrim's Pride's losses from the surrender of the securities, deemed to be a sale or exchange under Code Sec. 1234A, are subject to the limitations on capital losses under Code Sec. 1211 and Code Sec. 1212.
For a discussion of the requirements for the deduction of an abandonment loss, see Parker Tax ΒΆ114,510. (Staff Editor Parker Tax Publishing)
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