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Keywords

foreclosurepartnershipsustained
willforeclosurepartnershipsustainedrespondent

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Middleton v. Commissioner of Internal Revenue, 77 T.C. 310

Facts

Petitioners Milledge L. Middleton and Leone S. Middleton were limited partners in Madison, a partnership that purchased undeveloped land in Georgia. Due to a recession in 1974-75, the value of the properties decreased significantly, leading the partnership to abandon several tracts after mortgagees refused offers to accept deeds in lieu of foreclosure. The partnership subsequently faced foreclosures on these properties, which prompted the petitioners to claim losses on their tax returns.

During 1975 and 1976, Milledge and Leone Middleton (referred to hereinafter as petitioners) were class A limited partners in the Madison, Ltd., partnership (Madison). Madison was organized on September 7, 1973, as a Georgia limited partnership for the purpose of acquiring certain tracts of land as investment property.

Issue

The main issues for decision were whether the partnership sustained losses upon each mortgage foreclosure or upon an earlier abandonment of the properties, and whether these losses should be classified as ordinary or capital.

The issues for decision are: (1) Whether petitioners' partnership sustained losses upon each mortgage foreclosure of 5 tracts of land or upon an earlier abandonment of the properties; and (2) whether these losses are ordinary or capital.

Rule

The court applied the principle that losses from abandonment of property subject to nonrecourse debt are treated as capital losses, and that the timing of loss realization occurs at the point of abandonment rather than foreclosure.

Held, the losses were sustained by the partnership at the time of abandonment, even though the partnership was not then divested of title, and not when the mortgages were subsequently foreclosed.

Analysis

The court analyzed the actions taken by Madison, noting that the partnership had formally abandoned the properties by ceasing payments and offering deeds in lieu of foreclosure. The court concluded that the losses were realized at the time of abandonment, as the partnership was relieved of the encumbered properties and the associated obligations, thus constituting a capital loss.

In this case, Madison clearly took all necessary steps to abandon the respective properties for which the losses are claimed for 1975 and 1976. In each case, the partners met and determined that the properties had become worthless as the result of the mortgages substantially exceeding fair market value of the properties.

Conclusion

The court concluded that the losses were sustained by the partnership at the time of abandonment and were capital losses subject to the limitations of the Internal Revenue Code, rather than ordinary losses.

Decision will be entered under Rule 155.

Who won?

The petitioners prevailed in the case as the court ruled in their favor regarding the timing and characterization of the losses, determining that the losses were realized at the time of abandonment.

The court agreed with respondent's alternative position in this case. While our decision in Freeland was based upon the mortgagor's relief from indebtedness as a result of the voluntary reconveyance in lieu of foreclosure, and not the consequent abandonment under California law, we think the same result should obtain where the relief from indebtedness is the result of abandonment of the property by the mortgagor.

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