Tax Court - Abandonment of securities gives rise to capital loss, not ordinary loss 

December 11:  The U.S. Tax Court today issued an opinion finding that a $98.6 million loss resulting from the taxpayer’s abandonment of certain securities was a capital loss, and not an ordinary loss. Pilgrim’s Pride Corp. v. Commissioner, 141 T.C. No. 17 (December 11, 2013)

Read the Tax Court’s opinion [PDF 118 KB]


The taxpayer corporation was the ultimate successor-in-interest to a cooperative marketing association (taxed as a non-exempt cooperative under subchapter T of the Code).

In 1999, the cooperative was contractually required to and did purchase certain securities for $98.6 million a second cooperative. The securities, however, did not pay any dividends under terms that allowed for their deferral.

The securities issuer offered to redeem the securities for less than what was paid for them. The taxpayer cooperative countered, and the issuer rejected that counteroffer and made a second offer to redeem the securities for $20 million.

The taxpayer cooperative at this time was planning to merge with its wholly owned taxable corporation, and its board of directors decided to abandon the securities for no consideration, taking a position that a $98 million ordinary loss would produce tax savings greater than the $20 million offered by the issuer.

The taxpayer rejected the $20 million offer and abandoned the securities (thus removing the securities from its balance sheet at the time of the public offering). At the time, the taxpayer cooperative valued the securities at $38.8 million on its Generally Accepted Accounting Principles (GAAP) financial statements, and reported a $98.6 million ordinary loss deduction under section 165(a) and Reg. section 1.165-2(a) on its tax return.

Ultimately, the IRS issued a notice of deficiency finding that the loss on the abandonment of the securities was a capital loss rather than an ordinary loss as claimed by the taxpayer cooperative on its tax return.

Tax Court’s opinion

The Tax Court today issued an opinion concluding that the taxpayer was not entitled to a deduction for an abandonment loss on the surrender of the securities because the losses were treated as losses from a sale or exchange pursuant to section 1234A. Thus, under section 165(f), the taxpayer was entitled to a capital loss on the surrender of the securities.

The Tax Court’s summary of the holdings is as follows:

  • The securities were intangible property comprising rights that the taxpayer cooperative had in the management, profits, and assets of the issuer and that those rights were terminated with the surrender of the securities.
  • The $98.6 million loss on the surrender of the securities was attributable to the termination of the taxpayer’s rights with respect to the securities (i.e., capital assets) and pursuant to section 1234A, the loss is to be treated as a loss from the sale or exchange of capital assets.
  • The taxpayer was not entitled to an ordinary loss deduction for abandonment because the loss was treated as a loss from the sale or exchange of capital assets under section 1234A.
  • The taxpayer’s losses from the surrender of the securities, deemed to be a sale or exchange under section 1234A, were subject to the limitations on capital losses under sections 1211 and 1212.

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