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Fifth Circuit Allows a Nearly $100 Million Ordinary Loss for Pilgrim's Pride.

(Parker Tax Publishing March 24, 2015)

The Fifth Circuit reversed the Tax Court, finding that Code Sec. 1234A only applies to the abandonment of contractual rights, as opposed to rights inherent in assets like securities. By allowing a $98.6 million ordinary loss, the court validated the taxpayer's decision to decline a $20 million purchase offer in favor of a $30 million tax savings. Pilgrim's Pride v. Comm'r, 2015 PTC 61 (5th Cir. 2015).


Pilgrim's Pride Corporation is the successor-in-interest to Gold Kist, Inc., an association taxed as a nonexempt cooperative. In the late 1990's, 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.

In 2004, Southern States offered to redeem the securities for $20 million. Instead of accepting the offer, Gold Kist's board of directors decided to surrender the securities to Southern States for no consideration, reasoning a $98.6 million ordinary loss would produce greater tax savings than the $20 million offered by Southern States. 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).

Five years later, while Pilgrim's Pride was in bankruptcy, the IRS issued a deficiency notice to Pilgrim's Pride with respect to Gold Kist's 2004 tax year asserting that Gold Kist's loss from the abandonment of the Securities was a capital loss, rather than an ordinary loss, creating a tax deficiency of nearly $30 million. The IRS argued that Code Sec. 1234A(1) applied and rendered the abandonment a deemed sale or exchange of capital assets subject to capital loss treatment.

The Tax Court agreed with the IRS, holding that the securities were intangible property comprising rights that Gold Kist had in the management, profits, and assets of Southern States which terminated when Gold Kist surrendered the securities. Pilgrim's Pride appealed to the Fifth Circuit, challenging the IRS' determination that Gold Kist's abandonment generated a capital loss and arguing that Code Sec. 1234A was inapplicable.


Under Code Sec. 165(a) and Reg. Sec. 1.165-2(a), an abandonment loss deduction can be taken for a loss incurred and arising from the sudden termination of the usefulness in a 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(1) 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 Fifth Circuit noted that, by its plain terms, Code Sec. 1234A(1) applies to the termination of rights or obligations with respect to capital assets (e.g. derivative or contractual rights to buy or sell capital assets), not to the termination of ownership of the capital asset itself.

The IRS asserted that Code Sec. 1234A(1) also indirectly applies to the abandonment of a capital asset because such abandonment involves the termination of certain rights and obligations inherent in those assets. Thus, the IRS claimed, when Pilgrim's Pride abandoned the securities it abandoned the rights in the securities, meaning it should be treated as a capital loss pursuant to Code Sec. 1234A(1).

The court disagreed, stating that the IRS's position was essentially that Congress, rather than simply stating that the abandonment of a capital asset results in capital loss, chose to legislate that result by reference to the termination of rights and obligations "inherent in" capital assets. The court assumed that the ordinary meaning of Code Sec. 1234A accurately expressed its legislative purpose, noting that interpreting the section as the IRS argued would render Code Sec. 1234A(2) superfluous. Thus, the court found Pilgrim's Pride had abandoned the securities themselves, not a right or obligation with respect to the securities within the meaning of Code Sec. 1234A(1).

As an alternative argument, the IRS claimed that Code Sec. 165(g) required the abandonment of securities to be treated as a capital loss resulting from worthless securities. Although the securities were worth at least $20 million when Pilgrim's Pride abandoned them, the IRS argued that they were "worthless" because they were useless to Pilgrim's Pride.

The court found that this argument conflicted with prior precedent, as the Fifth Circuit had previously held in Echols v. Comm'r, 950 F.2d 209 (5th Cir. 1991) that property cannot be treated as worthless for tax loss purposes if it objectively has substantial value. Since the abandoned securities had a value of at least $20 million, they were not objectively worthless, and thus the court held Code Sec. 165(g) did not apply.

Because the court determined Code Sec. 1234A(1) only applies to the termination of contractual or derivative rights, and not to the abandonment of capital assets, the Fifth Circuit reversed the judgment of the Tax Court and allowed Pilgrim's Pride to claim a $96.8 million ordinary loss.

Caution: While the holding in this case may seem like a windfall for taxpayers looking to abandon securities to generate an ordinary tax loss, the regulations under Code Sec. 165(g) were amended in 2008 to provide that abandonment of securities generate capital losses (Reg. Sec. 1.165-5(i)).

For a discussion of abandonment losses, see Parker Tax ¶114,510.(Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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