CCA 200851054: No worthless security rule for partnership interests, so the loss stays ordinary

Plain-English summary

Two sentences answering a question that is not in the release. The message begins with the word "Because," so what survives is an explanation whose question has to be reconstructed, and the subject line is blank apart from "RE:".

The explanation rests on an absence. Whether a loss is ordinary or capital generally turns on whether there was a sale or exchange of a capital asset. An investment that simply becomes worthless involves no sale and no exchange, since nobody buys it and nothing is received for it, so on first principles the loss would be ordinary, which is the more favorable result because ordinary losses can offset ordinary income without the limits that apply to capital losses.

Congress addressed that for securities. Section 165(g) provides that a security which becomes worthless during the year is treated as though it had been sold or exchanged on the last day of the year. The provision manufactures the missing sale, and the effect is to make the loss capital, matching the treatment a shareholder would have received by selling the stock the day before it collapsed.

The writer's point is that no such provision exists for partnership interests. There is no equivalent of section 165(g) in that setting, so nothing supplies the deemed sale or exchange, and the general rule applies: worthlessness of a partnership interest is an ordinary loss. The asymmetry is a drafting fact rather than a policy judgment, and it means a partner and a shareholder in economically similar positions are treated differently.

The conclusion carries a condition, stated in six words: if the partner receives nothing in exchange. That is doing the real work, because the whole analysis depends on there being no sale or exchange, and a partner who receives anything on the way out has one. The release does not say what would count as receiving something, and that is exactly where this kind of question usually becomes contested. Nor does it give any citation beyond section 165(g), or address the authorities that have considered when a partnership interest is worthless in the first place.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: the opening word "Because," which continues a sentence begun in a message not part of this release; the empty subject line reading only "RE:"; and "section 165(g)" spelled out against the bare form used elsewhere in this batch.

Ruling snapshot

• Question: Is a loss on a worthless partnership interest ordinary or capital?
• Outcome: Advice given, in two sentences. Ordinary. There is no equivalent of section 165(g) for partnership interests, so nothing treats the interest as sold or exchanged, and worthlessness of a partnership interest is an ordinary loss if the partner receives nothing in exchange.
• Key authorities: IRC section 165(g). IRC section 1222 is the release's own UILC classification and is not cited in the text.

Full text (IRS public release)

ID: CCA_2008102716063350 Number: 200851054
Office: ---------------- Release Date: 12/19/2008

UILC: 1222.00-00

From: --------------------
Sent: Monday, October 27, 2008 4:06:35 PM
To: ----------------------
Cc:
Subject: RE:

Because there is no equivalent of section 165(g) for partnership interests. Worthlessness of a partnership
interest is an ordinary loss, if the partner receives nothing in exchange.