Abandonment Business

Attorney client calls about a new business he’s starting. Call it Abandonment Services, Inc. He got to thinking that it’s sometimes hard to prove an abandonment for tax purposes, especially with respect to intellectual property. So he’d like to create a service where people – who might have basis in their intellectual property – can abandon their property over to him. Abandonment Services, Inc. will charge a fee for this service.

A document will be provided to the abandoning taxpayer that says something like, “Joe taxpayer has expressed an intent to irrevocably abandon his property described as follows [enter property description here, in between these brackets]. In accordance with Joe Taxpayer’s intent, Abandonment Services, Inc. hereby acknowledges receipt of said property (i.e. the “abandoned property”) for zero consideration. Joe Taxpayer has irrevocably abandoned his property to Abandonment Services, Inc. and Joe Taxpayer will no longer hold any rights in said property – not a single one - from this day forward, forever and ever, into eternity.”

Question is: Will this business idea actually help Joe Taxpayer prove abandonment?

At common law, an abandonment may be generally defined as "the relinquishment of a right by the owner thereof without any regard to future possession by himself or any other person, and with the intention to foresake or desert the right [ . . . ]". It is "the voluntary relinquishment of a thing by its owner with the intention of terminating his ownership, and without [the intention of] vesting ownership in any other person; the giving up of a thing absolutely, without reference to any particular person or purpose [ . . . ]"

---1 C.J.S. Abandonment § 2 (1985) (emphasis added) [footnotes and citations omitted].

Where property is truly abandoned -- that is, relinquished without regard to any particular person -- the property may of course soon come to be owed by some person other than the person who abandoned it. But generally, an "abandonment" that is made to a particular person is not a common law abandonment.

There is such a thing as a statutory abandonment in bankruptcy, where the trustee or debtor in possession may abandon an item of property to a person having a "possessory interest."

If the state legislature has enacted a statute that modifies the common law rule, or if the case law of the state has developed so that the definition of abandonment has changed, then you might have an abandonment.

But, all this is somewhat mooted by the point that an abandonment is still a sale or other disposition of property under Internal Revenue Code sections 61(a) and 1001.

Generally, an abandonment (whether under common law or under statute) is a taxable event for Federal income tax purposes. (Exception: A statutory abandonment by the bankruptcy estate of an individual under either Chapter 7 or Chapter 11 may not be a taxable event.) If the amount realized under section 1001 is truly zero, and if the person abandoning the property can substantiate his/her adjusted basis amount in the property, it may not be a problem -- except that the abandonment of a capital asset may be a capital loss -- and the deductibility of the loss may be thereby limited.

The fee to be charged by "Abandonment Services, Inc." would be the amount realized upon the section 1001 disposition. {correction; see edit below]

EDIT: Correction. The fee would go FROM the taxpayer TO "Abandonment Services, Inc.", so the amount realized would be realized by Abandonment Services, Inc., not by the taxpayer. The taxpayer appears to have zero amount realized. I must've been asleep ......

For examples of the Federal income tax treatment of abandonment generally, see:

Yarbro v. Commissioner, 737 F.2d 479 (5th Cir. 1984), cert. denied, 469 U.S. 1189, 105 S. Ct. 959 (1985), at:

https://scholar.google.com/scholar_case ... s_sdt=3,44

and

Middleton v. Commissioner, 77 T.C. 310 (1981), aff'd per curiam, 693 F.2d 124 (11th Cir. 1982).

https://www.irs.gov/pub/irs-drop/rr-04-58.pdf

Worthlessness is not what is required, just this.

Section 165 losses have been referred to as abandonment losses to reflect that some act is required that evidences a taxpayer’s intent to permanently discard or discontinue use.

. There can be speculative value that, to the abandoner, is not worth as much as a tax saving.

Then we have to be sure the abandoner receives no consideration, so as to avoid its being viewed as a sale or exchange. I don't think the transaction you posit creates consideration for the abandoner. The cash goes the other way, as means of establishing that there was a transaction, an abandonment.

Could the expectation of a tax saving be "consideration"? Novel idea, I guess, but wouldn't the consideration have to be from the recipient of the asset? It's a stretch, but paying ASI a fee and receiving the written acknowledgment you describe might include an element of consideration. Or not. But that goes to the sale or exchange question; there'd still be a loss, just a question of ordinary or capital.

[ . . . ] I don't think the transaction you posit creates consideration for the abandoner. The cash goes the other way, as means of establishing that there was a transaction, an abandonment. [ . . . ]

Oh, good point. I didn't read Jeff's post carefully enough.

[ . . . ] Then we have to be sure the abandoner receives no consideration, so as to avoid its being viewed as a sale or exchange. [ . . . ]

That's another good point.

Granted, section 1001 is more comprehensive than "sale or exchange"; it deals with a sale or "other disposition." But, in the absence of any amount realized (assuming, for example, that the property is not burdened by a nonrecourse debt that would be deemed to be an amount realized), maybe the argument could be that section 165 trumps section 1001, in terms of the treatment as a section 165 ordinary loss rather than (maybe) as a capital loss.

1001is about any gain or loss. 1222 is about a capital gain or loss. 1222 does not say "disposition".

At common law, an abandonment may be generally defined as "the relinquishment of a right by the owner thereof without any regard to future possession by himself or any other person, and with the intention to foresake or desert the right [ . . . ]"

Just to be clear: The abandoning taxpayer has no regard as to (1) his own future possession [hence his willingness to actually pay money to get rid of the property] and (2) future possession by anyone else. He doesn’t care that Abandonment Services, Inc. becomes the owner of the property or anyone else for that matter. He basically wants there to be a witness to his abandonment. Someone that is an unrelated third party.

When it comes to an asset like the one we’re talking about (i.e. intellectual property), it’s not like tangible property, where physical abandonment is much easier to ascertain. Moreover, there is no counterparty, or other interested party, with respect to presently unused intellectual property. If this was a partnership interest, for example, we could notify the partnership as to our abandonment.

The whole idea, with this Abandonment Business idea, is to make the abandonment visible, so that the taxpayer has something to point to if questioned by the IRS. That’s it, nothing more. In other words, we’re trying to create an “act” that evidences the intent to abandon.

I think we know what the IRS would say if we presented a signed affidavit, as signed by the taxpayer, wherein the taxpayer said something like, “It is my intent to abandon such and such property and earlier this morning, I abandoned such and such property by putting all physical copies of it in the neighborhood dumpster and by deleting all electronic copies from my computer.” IRS would say it’s “self-serving.”

Also, I took a look at that first case you cited…it didn’t seem that whether or not there was an abandonment was an issue. It also involved the property subject to a non-recourse debt.

Query if common law, as to the “future possession of any other person” is part of the tax law.

And I’m pretty sure that the loss from abandoning an unencumbered asset is not a sale or exchange. It fails that basic requirement.

Just to be clear: The abandoning taxpayer has no regard as to (1) his own future possession [hence his willingness to actually pay money to get rid of the property] and (2) future possession by anyone else. He doesn’t care that Abandonment Services, Inc. becomes the owner of the property or anyone else for that matter. He basically wants there to be a witness to his abandonment. Someone that is an unrelated third party.

The problem is that in a dispute with the Internal Revenue Service, a court might conclude that this language suggests the absence of a common law abandonment:

Joe Taxpayer has irrevocably abandoned his property to Abandonment Services, Inc.

(emphasis added). I would steer clear of that kind of language.

Also, I took a look at that first case you cited…it didn’t seem that whether or not there was an abandonment was an issue. It also involved the property subject to a non-recourse debt.

If you're referring to the Yarbro case, the issue decided by the Court was whether an individual taxpayer's loss resulting from the putative abandonment of property subject to a non-recourse mortgage exceeding the market value was an ordinary loss or a capital loss. The Court held that the putative "abandonment" of property subject to non-recourse debt was a sale or exchange for purposes of determining whether the loss was a capital loss.

Query if common law, as to the “future possession of any other person” is part of the tax law.

The short answer is yes. Abandonment is a concept of state property law, and Federal income tax law generally looks to state property law concepts. Another example of this would be community property laws of a state, where the determination of whether an item of income is community income of both spouses, or is separate income of just one spouse, is relevant in determining which spouse has realized income for Federal income tax purposes.

And I’m pretty sure that the loss from abandoning an unencumbered asset is not a sale or exchange. It fails that basic requirement.

Agreed -- assuming that the putative abandonment has economic substance -- that is, assuming that the "abandoner" is not really receiving something of value from someone in exchange for "abandoning" the asset.

I think there is a pretty good argument that for Federal income tax purposes, the taxpayer described in your initial post is not receiving anything of substantial value from Abandonment Services, Inc. And, I think that the arrangement could fit the legal concept of common law abandonment. The arrangement would be "cleaner" if the taxpayer avoids making oral or written statements such as "I am abandoning the property to Abandonment Services, Inc."

The arrangement would be "cleaner" if the taxpayer avoids making oral or written statements such as "I am abandoning the property to Abandonment Services, Inc."

I agree. If that is the case – that Abandonment Services, Inc. (ASI) will not scoop up the property and own it, take possession of it, etc. – then ASI is basically providing witness services, nothing more.

I think my attorney client would prefer it if there is evidence of (1) a discard and (2) someone else – whoever it may be – saying they witnessed the abandonment and that they also possess it. Because if someone else says they possess it, that would mean the taxpayer that discarded it, doesn’t possess it.

Do you see?

When you have these cases with the IRS, it is very, very difficult to prove abandonment. What typically happens is there is a prolong period of non-use. And then the taxpayer, at some point, says, “I’m done with it. I’m writing off my basis and I’m abandoning it.” That’s hard to prove with no counterparties, no interested parties, and also, the nature of the property itself (which might be self-created). All of those issues are removed with the client’s business idea. The IRS can’t now say, “You really didn’t discard it. You still own it. You could try to make it productive at some point in the future.”

I do suppose, though, any client of ASI could lie. Any client could hire ASI to take over their abandoned property and then later, contrary to the agreement with ASI, and without ASI’s knowledge, try to make the property productive as if they still owned it. But if they did that, and if the ASI agreement is legally binding, I think you’d still have a valid abandonment and then, quite simply, a violation of the agreement. Now, if the client wanted to get the property back from ASI…

And I'd think ASI would, at minimal expense, want to protect its legal ownership of the abandoned property. ASI can't be sure the abandoned property won't turn out to have value after all.