IRS won't back down on tough abandonment test for loss deductions on worthless stock

If you want to take a loss deduction for worthless stock, you must be prepared to establish permanent abandonment under final regulations recently issued by the IRS. Under the final rules, a taxpayer must permanently surrender and relinquish all their rights in the security and receive no consideration in exchange for the security to establish permanent abandonment.

Background

In general, a security must become totally worthless and have zero value to result in a deductible loss under Code Sec. 165. Proposed regulations issued by the IRS had clarified that the abandonment of a security would establish its worthless for purposes of the loss deduction. Additionally, the proposed rules required that a taxpayer had to permanently relinquish and surrender all their rights in the security, receiving no consideration, such as money or property, in exchange for the security.

Capital assets

In addition to adopting the proposed regulations without change, the final rules also provide that a loss from the abandonment of a security that qualifies as a capital asset is generally to be treated as a loss from the sale of exchange of a capital asset. One concession: any security in a corporation that is affiliated with a taxpayer that is a domestic corporation will not be treated as a capital asset.

The final rules apply in full force to any abandonment of stock or securities after March 12, 2008.

(T.D. 9836)