CCA 200851050: Abandonment proves worthlessness but is not required to prove it

Plain-English summary

Less an opinion than a reading list, assembled in an afternoon and sent over with two passages quoted at length and a closing observation that does the analytical work.

The subject is what a taxpayer must show to deduct a loss for something that has become worthless. Section 165 allows a deduction for a loss sustained during the year, but the regulations do not let a taxpayer simply declare that an asset has stopped being worth anything. The loss must be evidenced by a closed and completed transaction, fixed by an identifiable event, and actually sustained in the year claimed. The requirement exists because worthlessness is a judgment about value, and a judgment made privately inside the taxpayer's own head is not something the Service can examine or a court can date. An identifiable event supplies the date and the proof.

The first quoted passage sets out that framework and lists what can serve as the event: a sale, an abandonment, or other acts or events reflecting that the property is worthless. Abandonment therefore works, which answers the question as asked. The writer introduces the collection as cases treating abandonment as an identifiable event establishing worthlessness.

The second quoted passage, from a court of appeals decision, pushes in the opposite direction and is quoted at greater length. Its point is that abandonment is not indispensable. One cited case is described as standing for the proposition that abandonment is not the exclusive way to establish worthlessness of an asset whose title remains with the taxpayer. Another is distinguished as a case where the taxpayer happened to confirm a subjective determination of worthlessness by abandoning the property and writing it off, which the court characterizes as overt and objective affirmations rather than as a requirement. And the first case is read as having rested on the presence or absence of value in the asset itself, supporting the conclusion that a taxpayer need not abandon an asset to claim a worthlessness deduction. So abandonment is one factor among several, not a precondition.

Eight further citations follow with pinpoint pages and no discussion, spanning the Tax Court, four courts of appeals, a district court and the Claims Court. They are raw research, handed over for the reader to work through.

The closing sentence is the writer's own and is the sharpest thing in the release. If the taxpayer thought the stock was not worthless, then it must have made some sort of gift or capital contribution, and it would not have a loss. This closes off the escape route. A taxpayer who transfers stock away while maintaining that the stock still had value has not suffered a loss from worthlessness; they have made a transfer for no consideration, which is a gift or a contribution to capital depending on the relationship, and neither produces a deduction. The taxpayer cannot hold both positions at once.

Every citation here is reproduced exactly as the release gives it, including the pinpoint pages, the subsequent history and the prior Board of Tax Appeals decision. The citation-checking tool was unavailable in this session, so none of them was confirmed, and no reporter, court or year has been supplied from outside the document. Check them before relying on any of them. Compare 0851054 in this batch, sent the same afternoon under a similarly empty subject line, on the ordinary character of a loss from a worthless partnership interest.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: the star pagination marker "[1006]" inside the first quoted passage, and the " * *" separators in the second, which indicate the quotations were pasted in from a research database; the bare footnote marker "2" left stranded on its own line; the ellipsis after "For example"; "Hummel v. United States, 227 F. Supp. 30, 3233 (D. Cal. 1963)" with the run-together page range, left as printed rather than repaired; "affd. sub nom."; the doubled court designation in "62 T.C. 59, 71 (T.C., 1974)"; the section symbol in "Code § 165" against the spelled-out form earlier; and the empty subject line reading only "RE:".

Ruling snapshot

• Question: Does abandonment establish worthlessness for a loss deduction under section 165, and is it required?
• Outcome: Advice given, as an annotated collection of authorities rather than a conclusion. A number of cases treat abandonment as an identifiable event establishing worthlessness, and the regulations list a sale, an abandonment or other acts reflecting worthlessness as qualifying events. But abandonment is not an indispensable requirement for a worthlessness deduction, and is one of several factors in testing whether the taxpayer's own determination of worthlessness is sustainable. The writer adds that a taxpayer who thought the stock was not worthless must have made a gift or a capital contribution instead, and would have no loss.
• Key authorities: IRC section 165; Treas. Reg. 1.165-1(b) and (d) and 1.165-2(a); Proesel v. Commissioner, 77 T.C. 992, 1005 (1981); Echols v. United States, 950 F.2d 209, 211-214 (5th Cir. 1991); Gordon v. Commissioner, 46 B.T.A. 1201, 1210 (1942), affirmed sub nom. Helvering v. Gordon, 134 F.2d 685 (4th Cir. 1943); McCarthy v. United States, 129 F.2d 84, 86 (7th Cir. 1942); Burke v. Commissioner, 32 T.C. 775, 780-81 (1959); Laport v. Commissioner, 671 F.2d 1028, 1032 (7th Cir. 1982); Hummel v. United States, 227 F. Supp. 30 (D. Cal. 1963); Haspel v. Commissioner, 62 T.C. 59, 71 (1974); Louisville & Nashville RR. Co. v. Commissioner, 66 T.C. 962, 1004-10 (1976); Jupiter Corp. v. United States, 2 Cl. Ct. 58, 71 (Ct. Cl. 1983); and the Rhodes and Denman v. Brumback decisions discussed in the quoted passage without full citations. None was independently verified here.

Full text (IRS public release)

ID: CCA_2008102717274750 Number: 200851050
Office: ---------------- Release Date: 12/19/2008

UILC: 165.06-00

From: --------------------
Sent: Monday, October 27, 2008 5:27:48 PM
To: ----------------------
Cc:
Subject: RE:

There are a number of cases you can look at that treat abandonment as an identifiable event establishing worthlessness. For example …

Proesel v. Commissioner, 77 T.C. 992, 1005 (1981):

The final question to be considered is whether the right of Benwest to receive payment from Gavilan became worthless in 1972. Generally, section 165 allows a deduction for a loss sustained during the taxable year and not compensated for by insurance or otherwise. To be allowable, a loss must be evidenced by closed and completed transactions which are fixed by identifiable events and actually sustained during the taxable year. Sec. 1.165-1(b) and (d), Income Tax Regs. Such events include a sale, an abandonment, or other acts or events which reflect the fact that the property is worthless. Secs. 1.165-1(d), 1.165-2(a), Income Tax Regs.; Gordon v. Commissioner, [*1006] 46 B.T.A. 1201, 1210 (1942), affd. sub nom. Helvering v. Gordon, 134 F.2d 685 (4th Cir. 1943).

Echols v. United States, 950 F.2d 209, 211-214 (5th Cir. 1991):

Additionally, the abandonment in Rhodes was only one of several factors the court considered in searching for an identifiable event establishing worthlessness. Rhodes stands for the proposition that abandonment is not the exclusive way to establish worthlessness of an asset the title to which remains vested in the taxpayer.

In Denman v. Brumback, relied on by the Commissioner, the taxpayer confirmed his subjective determination of worthlessness by abandoning real estate and writing it off. Those were overt and objective affirmations by the taxpayer of the subjective determination of worthlessness.

The Proesel court clearly based its holding on an analysis of the value or absence of value of the asset, supporting the conclusion that a taxpayer is not necessarily required to abandon an asset in order to take a loss deduction based on worthlessness. 2

Rhodes and Proesel establish that, although an act of abandonment by the taxpayer may be one of several factors in the analysis of whether the taxpayer's subjective determination of an asset's worthlessness is sustainable, abandonment is not an indispensable requirement for a worthlessness deduction under Code § 165.

McCarthy v. United States, 129 F.2d 84, 86 (7th Cir. 1942) Burke v. Commissioner, 32 T.C. 775, 780-81 (1959) Laport v. Commissioner, 671 F.2d 1028, 1032 (7th Cir. 1982) Helvering v. Gordon, 134 F.2d 685, 689 (4th Cir. 1943) Hummel v. United States, 227 F. Supp. 30, 3233 (D. Cal. 1963) Haspel v. Commissioner, 62 T.C. 59, 71 (T.C., 1974) Louisville & Nashville RR. Co. v. Commissioner, 66 T.C. 962, 1004-10 (T.C. 1976) Jupiter Corp. v. United States, 2 Cl. Ct. 58, 71 (Ct. Cl. 1983).

If the taxpayer thought the stock was not worthless, then it must have made some sort of gift or capital contribution; it wouldn't have a loss.

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