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Ordinary loss allowed limited partner who abandoned interest.

The Tax Court recently allowed Philip Citron, a limited partner who abandoned his partnership interest, an ordinary loss. Central to this favorable decision was the partnership's lack of liabilities.

Citron, a doctor, became a limited partner in Vandom, a film production partnership, by paying $60,000 in cash in 1980. In 1981, after the film was completed, a dispute arose with a producer. At a meeting later that year, the general partner told the limited partners that because of this dispute the only way Vandom could make money was if the limited partners contributed more funds and an X-rated film was made from the partnership's working print.

Citron told the general partner at that meeting that he would not contribute more money or be involved with an X-rated movie and that he wanted nothing further to do with Vandom. The limited partners then voted to dissolve Vandom. Vandom's CPA was told the partnership would have no further activity or income and the investment should be completely written off; he was asked to prepare a final tax return. Vandom had no liabilities at the end of 1981.

Citron claimed a $60,000 ordinary abandonment loss for 1981. The Internal Revenue Service argued the loss was a capital loss, resulting from a sale or exchange of the partnership interest, and thus was limited to offsetting capital gains plus $3,000.

Result: Citron was allowed an ordinary abandonment loss under Internal Revenue Code section 165. To obtain an abandonment loss, a taxpayer must show an intent to abandon and also must perform an "affirmative act of abandonment." Citron's statements to the general and limited partners at the late-1981 meeting satisfied these tests.

Further, the loss was ordinary, not capital. There was no sale or exchange because Citron was not relieved of liabilities as a result of abandoning his interest. Had there been a decrease in Citron's liabilities, the partnership tax provisions would have operated to treat this loss as capital.

Note: Revenue ruling 76-189, holding that a capital loss resulted to partners on termination of a partnership with no assets or liabilities, was rejected by the court.
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Article Details
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Author:Wagenbrenner, Anne
Publication:Journal of Accountancy
Date:Nov 1, 1991
Words:354
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