Fifth Circuit holds that abandonment of securities is ordinary loss
The Fifth Circuit Court of Appeals ruled on Feb. 25 that a corporation recognized an ordinary loss related to its abandonment of securities. The decision reversed the Tax Court's 2013 holding that the corporation's loss was a capital loss under Section 1234A.
In Pilgrim's Pride Corp. v. Commissioner, No. 14-60295 (5th Cir. 2015), taxpayer Pilgrim's Pride had purchased securities for approximately $98.6 million. Several years later, the issuer of the securities offered to redeem the securities from Pilgrim's Pride for approximately $20 million.
The taxpayer determined that abandoning the securities would result in a $98.6 million ordinary tax loss, which would produce more in tax savings than the $20 million redemption offered by the issuer. Consequently, the taxpayer's board of directors decided to irrevocably abandon the securities for no consideration.
Generally, a taxpayer is allowed a deduction for a loss sustained in a taxable year when the loss was not compensated by insurance or otherwise under Section 165(a). A capital loss from the sale or exchange of a capital asset is allowed only to the extent provided in Sections 1211 and 1212, under Section 165(f). However, the abandonment of a capital asset for no consideration is not a "sale or exchange" for the purposes of Section 165(f) under Echols v. Commissioner, 935 F.2d 703, 707 (5th Cir. 1991).
Under Section 1234A, taxpayers are required to recognize capital gain or loss related to the cancellation, lapse, expiration or other termination of a right or obligation (other than a securities futures contract as defined in Section 1234B) with respect to property that is (or would be) a capital asset in the hands of the taxpayer.
In 2013, the Tax Court held that the loss to Pilgrim's Pride from the abandonment of the securities was a capital loss under Section 1234A. Specifically, the Tax Court concluded that the ownership of the securities constituted a "right" with respect to property that was a capital asset in the hands of Pilgrim's Pride. Thus, the termination of such a right by Pilgrim's Pride was subject to Section 1234A.
The circuit court's decision reversed that Tax Court decision and held that the loss to Pilgrim's Pride from the abandonment of the securities was an ordinary loss. The circuit court stated that Section 1234A does not apply to the termination of ownership of the capital asset itself, and that Pilgrim's Pride abandoned the securities and not "a right or obligation with respect to the securities."
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