Should I choose that I "abandoned [my] partnership interest" or "sold partnership interest" in the Turbo Tax interview?

[Anonymous]

The final K-1 of a dissolved partnership includes a "Disposition of assets with Prior Section 179 Expense" that lists the asset description of "Abandonment of leasehold improvements." There was no "sale" because the partnership had no value. But was the entire disposition an "abandonment?" Turbo Tax says, "if you're not sure, choose "Sold Partnership Interest," but choosing "abandoned" yields $500 in tax savings for some reason.

[tomhines]

I have affirmatively abandoned a worthless partnership interest. how do I report that ordinary loss. I have a legal opinion from my lawyer substantiating the abandonment was done correctly

[Rick19744]

Unfortunately only the IRS and the court will determine if the abandonment meets the requirements of Section 165.  This is a highly contested area.  If you have an opinion from an attorney that in their opinion it meets the requirements, then they should be able to advise you as to how to report this on your tax return.  I believe this should be reported on form 4797.  But be advised, depending on the size of the ordinary loss you are claiming, don't be surprised if you win the audit lottery.

[Rick19744 · Accepted solution]

You did not abandon your interest.  It was effectively "sold" with no proceeds.  The abandonment of a partnership interest is a highly scrutinized area for the IRS.  Additionally, to take a loss for abandonment of a partnership interest, a taxpayer must show that in the year the loss deduction was claimed, the taxpayer intended to abandon the partnership interest and that there was an affirmative act of abandonment of the interest.

The abandonment of leasehold improvements by the partnership is not correlated to a taxpayer making a claim for an abandonment of their partnership interest.

The reason for the high scrutiny by the IRS is that there is a significant character difference in how the loss is treated; capital versus ordinary and that is why you could see a difference in the tax impact.