By: Amanda Wilson
Several years ago, many taxpayers faced with underwater partnerships would abandon their partnership interests, thereby triggering an ordinary loss. This ordinary loss was often preferred over the capital loss that would be triggered if the taxpayer’s sold their partnership interests or liquidated the partnership. Capital losses are less advantageous, as they can generally only be used to offset capital gains. By contrast, ordinary losses can offset ordinary income, providing a much bigger tax benefit.
Unfortunately, in 2013, the Tax Court determined in the Pilgrim’s Pride case that abandonment losses should be treated as capital losses. Many (including me) thought that the Tax Court’s decision was incorrect. I’m happy to announce that the Fifth Circuit recently agreed. The Tax Court’s decision was overturned and once again, abandonment losses are treated as ordinary losses. So if you have an interest in a partnership that is not doing well, you may want to consider abandoning it.
More information about this development can be found here.