## Facts

- B. Philip Citron, a physician, became a limited partner in Vandom Productions, a California limited partnership formed to produce and market a motion picture.
- On September 26, 1980, Citron contributed $60,000 in cash for his limited partnership interest.
- The film project deteriorated after a dispute with an executive producer who withheld the film negative, leaving only a poor-quality copy and preventing commercial distribution as planned.
- Citron informed the general partner and other limited partners that he wanted no further involvement and sought to exit the investment.
- The limited partners voted to dissolve the partnership, and the partnership’s final tax return was prepared.
- Citron received no distribution or other consideration for relinquishing his interest, and the partnership did not assume any liabilities from Citron.
- On the Citrons’ 1981 return, Citron claimed a $60,000 loss, treated as an ordinary loss based on abandonment of his partnership interest.
- The Commissioner issued a notice of deficiency disallowing the loss and asserting an accuracy-related addition to tax for negligence, contending Citron had not performed an affirmative act of abandonment and that any loss was capital because it arose from a sale or exchange.

## Issues

1. Whether Citron sustained a deductible loss in 1981 under § 165 with respect to his limited partnership interest (including whether the facts supported a theft/embezzlement loss theory or an abandonment loss theory).
2. If a § 165 loss was sustained, whether the loss was ordinary or capital in character, including whether the relinquishment constituted a “sale or exchange” of a capital asset.

## Decision

- The court held Citron sustained a deductible loss in 1981 attributable to abandonment of his limited partnership interest.
- The court rejected characterization of the loss as a theft/embezzlement loss.
- The court characterized the loss as an ordinary loss under § 165, not a capital loss, because the abandonment was not a sale or exchange and involved no consideration or liability relief.
- Citron was entitled to deduct his unrecovered $60,000 basis in 1981.

## Legal Principles

- A § 165 abandonment loss requires (1) intent to abandon and (2) an affirmative act evidencing abandonment; mere worthlessness is insufficient.
- A partner’s relinquishment of a partnership interest without consideration and without relief from liabilities may produce an ordinary loss under § 165 because it is not a “sale or exchange.”
- If the partner receives consideration or is relieved of liabilities in connection with terminating the partnership interest, the transaction may be treated as a sale or exchange, producing capital loss treatment under partnership sale/exchange principles.
- A theft loss under § 165 requires proof of theft within the statutory meaning; a failed business venture or contractual dispute, without proof of theft, does not qualify.

## Conclusion

The Tax Court allowed an ordinary § 165 abandonment loss for Citron’s unrecovered $60,000 basis in a limited partnership interest where Citron intended to abandon, took affirmative steps consistent with abandonment (including participating in dissolution), and received neither consideration nor liability relief, making 1981 the proper year for the deduction.


Citron v. Commissioner, 97 T.C. 200 (1991)