New Regulation Suggests Code Sec. 1234A May Not Apply, Allowing Taxpayers to Receive Ordinary Losses on Abandonment of Nonsecurity Capital Assetss

Reg. 1.165-5(i) seeks to treat abandoned securities as equivalent to a sale or exchange in order to deny ordinary loss treatment. However, the regulation may be subject to challenge as violating Section 165. Even if the new regulation is allowed to stand, it resolves the issue of the application of Section 1234A. The new regulation is indirect evidence that Section 1234A was never meant to apply to the underlying assets, but only rights associated with the assets. Therefore, abandonment or worthlessness of capital assets which are not securities will receive ordinary loss treatment. For an abandonment to be effective, the taxpayer must affirmatively take some action to show intent to abandon. Normally, in the absence of worthlessness, giving up legal title will be sufficient to show such intent.