Tax News
Pilgrim’s Pride is Reversed in the 5th Circuit
February 26, 2015
Over a year ago, Pilgrim’s Pride litigated a Section 1234A issue in the Tax Court. The issue was whether the taxpayer could claim an ordinary business loss on the abandonment of securities, and more importantly, whether  Section 1234A applies to the direct abandonment of securities as compared to the abandonment of “rights with respect of” securities. The taxpayer lost in the Tax Court but it prevailed in the 5th Circuit (Pilgrims's Pride v. Comm’r; No. 14-60295), and on top of that, quite spectacularly. The decision was published yesterday.

In the private M&A and private equity fund context, the issue comes up with respect to claiming an ordinary business loss with respect to abandoning a partnership interest of a portfolio company. As we discussed in our prior coverage of Pilgrim Pride (here), the general consensus as of now is that as long as there is no relief of liabilities as part of the abandonment, it is possible for the taxpayer to claim an ordinary business deduction. Some commentators, however, were skeptical as to this result claiming that potentially Sec. 1234A imposes capital loss treatment because the disposition of the partnership interest was technically a disposition of a right with respect of capital asset property (i.e. the partnership interest). Well, hopefully, this concern is put to bed at least for now. The 5th Circuit plainly disagreed with the IRS saying that the legislative history is rather clear that Sec. 1234A does not apply to direct interest in capital assets. The section was enacted to eliminate a tax straddle derivatives loophole. To quote the Court: “By its plain terms, § 1234A(1) applies to the termination of rights or obligations with respect to capital assets (e.g. derivative or contractual rights to buy or sell capital assets).” Furthermore, the Court astutely provided that the IRS’ interpretation of the rules would render Sec. 1234A(2) superfluous. It also seemed to chastise the IRS for proffering arguments that imply that Congress legislates in logic puzzles. In too many words, this was a great win for the taxpayer on a rather esoteric issue with very tangible practical implications.

Hopefully there will be no further controversy with respect to the application of 1234A and the direct abandonment of capital assets.
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Tags: 1234A, abandonment of a capital asset, abandonment of a partnership interest, Piligrim Pride