Tax Court Worthless Partnership Interest Loss Case Fails to Address Several Key Issues

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In MCM Management, the Tax Court, in a memorandum opinion, held that a partnership interest was worthless and generated an ordinary loss based on the facts of the case. Some key takeaways from the case follow:

  1. There is no discussion in the case of cancellation of indebtedness income. Since the court held that there was no reasonable prospect of repayment in 2009, the year of the loss, there should have been an issue of when, if at all, the taxpayer had cancellation of indebtedness income.
  2. Revenue Ruling 93-80 is not discussed or even cited in the case. That ruling held that if there is an abandonment or worthlessness of a partnership interest and there is debt relief under section 752(b), the loss is capital and not ordinary. The court allowed an ordinary loss in this case with no discussion of the character issue. The court does not discuss the allocation of any senior or subordinated debt to the taxpayer so it is not possible to tell whether this issue was present in the case.
  3. The amount of a loss under section 165 is the tax basis of the asset, in this case the partnership interest. There is no indication in the case as to whether only the equity basis was claimed as a loss, as is the normal rule, or whether a debt basis was also claimed even though there may have been no COD income. The latter treatment would be incorrect.
  4. The court held that you can have a positive section 704(b) capital account and still claim a worthlessness deduction.

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