Abandoning a partnership interest.

Sometimes the owner of an asset decides to abandon his or her property. Such a decision may be based on the property's loss in value or on other factors.

ABANDONMENT VS. WORTHLESSNESS 

While the concepts may be related, abandoning a property or asset is not necessarily the same as determining it is worthless. Either course of action may allow a taxpayer to take a loss deduction, but determining whether an asset has been abandoned is an objective test.

Abandonment. If property is abandoned, its owner may be able to take a deductible loss for its value. Two general requirements must be met to do so. There must be an intent to abandon and some affirmative act or statement reasonably calculated to give a third party notice of the abandonment. The determination of intent and the corresponding action represent a factual determination, depending on the circumstances of each situation.

Partnership interests. If a partner wishes to abandon a partnership interest, he or she must communicate this intent to the other partners. Such a communication evidences the intent to abandon and serves as the affirmative action necessary to demonstrate this intent. Obviously, a written communication is the best indication; however, there have been situations when an oral communication to the other partners has been sufficient.

CONSEQUENCES OF ABANDONMENT

When abandoning a partnership interest, a partner claims a loss for that interest's value. The amount of the loss is the partner's basis in the property-generally his or her capital account balance increased by his or her share of partnership liabilities. Even if a partner has a negative capital account in a partnership, the basis may be sufficient to generate a loss for the interest's abandonment.

Losses are either ordinary or capital. The nature of an abandonment loss depends on whether consideration has been received by the person claiming the loss at the time of the abandonment. If it has been received, the loss generally is a capital loss; if there was no consideration, it is an ordinary loss. The resolution of this issue often depends on the nature of any debt on the abandoned property. If there is debt and it is nonrecourse (the debtor cannot force the taxpayer to repay it), consideration is deemed to have been received for the abandonment and any loss is capital; however, if the taxpayer is personally liable for the debt and is not relieved of it as a result of the abandonment, the loss may be an ordinary one.

Note: If the taxpayer claims an abandonment loss because he or she was not relieved of the partnership debt at the time of abandonment, he or she may have cancellation of indebtedness income if (and when) the debt is subsequently forgiven.

Also, if the partner abandoning a partnership interest is insolvent or bankrupt, other issues may affect the tax results.

Passive activity losses. Generally, losses from a passive activity can be deducted when the taxpayer disposes of his or her entire interest in the passive activity in a fully taxable transaction. If this is the case with an abandonment of passive activity property, a taxable disposition triggers the recognition of any suspended passive losses.

No tax consequences. Abandoning a partnership interest has other non-tax-related consequences that must be considered. Some of these may stem from the partnership agreement, which may include allocations or other provisions relating to withdrawals and similar partnership transactions.

For a discussion of this and other recent developments, see the Tax Clinic department, edited by Thomas Ochsenschlager, in the February 1993 issue of The Tax Adviser.

Ed. note: The material discussed provides general information, Before you take any action in this area, the appropriate code sections, regulations, cases and rulings should be examined.