In my blog entry on December 17, 2013, I noted the Tax Court’s opinion in Pilgrim’s Pride Corporation v. Commissioner, 141 T.C. No. 17, which analyzed the tax consequences of an abandonment of shares of stock and (in dicta) the abandonment of interests in partnerships. In Pilgrim’s Pride, the Tax Court found that Section 1234A caused the abandonment to result in capital loss (as opposed to ordinary loss) notwithstanding the lack of a sale or exchange. Seems that abandonment is on the mind of the Tax Court and IRS these days as evidenced by the issuance of Albert Chen v. Commissioner, T.C. Summ. Op 2014-6. This case will be of interest to investors in real estate as well as securities who wish to show that an abandonment has taken place in an effort to harvest a loss.
Mr. Chen, a retired engineer, and his wife, a registered nurse who became a realtor, in 2003 decided to develop and subdivide property in Greenville, New York (where they lived). They worked with various professionals to come up with a plan for the development of the Chen’s property and to modify the plans a number of times over a period of several years, spending significant amounts to do so. The Chens claimed Schedule C expenses for such work but the IRS disallowed the deduction of such expenses on the grounds that the Chen’s activity with respect to their property did not rise to the level of being a trade or business. Interestingly, the court found that the expenses relating to the taxpayer’s property were not currently deductible in the year at issue unless the development project was completely abandoned in that year.
Thus the case became an analysis of whether the taxpayer had completely abandoned the property. The taxpayers argued that they had completely abandoned the property because of the severe decline in the housing market in 2009 and a change in wetland laws which would have required a complete revision of their development plans. The court, however, found that the taxpayer failed to demonstrate that the change in the wetland laws affected their development efforts in a way that would require complete abandonment (based on taxpayer’s testimony that all they really needed to do was to modify their development plans). The court also noted that the taxpayer continued through 2009 and into 2010 to seek approval for certain plan changes and that there was evidence that the Taxpayer had stated in correspondence to the IRS in 2011 that taxpayer would revive the development of the land in the event of an economic recovery. Based on these factors, the court concluded that the abandonment had not taken place as of 2009.
While this opinion is of limited precedential value and is not subject to further court review, it does show an interest in the IRS and the Court to deal with abandonments seriously. In light of Chen, it may be that having a transaction treated as an abandonment will be difficult to prove. Likewise, after Pilgrim’s Pride, the ability to create ordinary losses from an abandonment may be limited.