Tax Court Stretched Tax Code Too Far on Abandonment Transactions.

The plaintiff bought $98.6 million of third-party securities via an asset purchase agreement.  The securities lost value, and the third party offered to redeem them for $20 million which would have caused the transaction to have been treated as a capital loss (deductible against capital gain for five years).  The plaintiff didn't accept the offer, instead voluntarily surrendering them to the third party.  The plaintiff reported a $98.6 million loss on the surrender as an abandonment (I.R.C. Sec. 165) loss which was ordinary in nature.  The IRS maintained that the loss was a capital loss, which severely limited its deductibility.  The Tax Court, in Pilgrim's Pride Corp. v. Comr., 141 T.C. No. 17 (2013), agreed with the IRS in holding that I.R.C. Sec. 1234 caused the abandonment to trigger a capital loss even though there was no sale or exchange of the securities.  In addition, the Tax Court invalidated a portion of Rev. Rul. 93-80 where the IRS has determined that the abandonment of a partnership interest where no liability was released under I.R.C. Sec. 752 was not a sale or exchange and the result was ordinary loss treatment (i.e., full deductibility).  On appeal, the appellate court reversed.  The court determined that I.R.C. Sec. 1234A(1), by its plain terms, only applies to the termination of contractual or derivative rights and not to the abandonment of capital assets.  The court noted that the abandonment was of the securities and not a "right" or "obligation" with respect to the securities.  Pilgrim's Pride Corp. v. Comr., No. 14-60295 (5th Cir. Feb. 25, 2015).