77 T.C. 113">*113 Respondent determined a deficiency in the amount of $ 10,447.92 in petitioners' Federal income tax for 1976. The sole issue for decision is whether the loss on petitioner Neil J. O'Brien's withdrawal from a partnership was a capital or ordinary loss.

FINDINGS OF FACT

Petitioners Neil J. O'Brien (petitioner) and Patricia M. O'Brien, husband and wife, were legal residents of Dallas 77 T.C. 113">*114 County, Tex., when they filed their petition. They timely filed a joint Federal income tax return for 1976.

On March 1, 1973, 1981 U.S. Tax Ct. LEXIS 96">*99 petitioner and others formed a joint venture known as the South Arlington Joint Venture (South Arlington). The purpose of the joint venture was to hold real estate for investment. Under the terms of the joint venture agreement, petitioner had a 10-percent share of the venture's profits, losses, and liabilities.

On March 1, 1973, South Arlington purchased a 213.423-acre tract of land in Tarrant County, Tex., from Gifford Touchstone, trustee, for $ 1,150,956.10. The consideration for the purchase included a $ 1,000,348.65 wraparound promissory note secured by a second vendor's lien and second lien deed of trust for the benefit of the holder of the note. The second lien note provided that recourse for the holders of the note was limited to the recovery of the property securing the note. The $ 1,000,348.65 promissory note "wrapped around" a note executed by Gifford Touchstone, trustee, in the amount of $ 915,663.05 payable to R. G. Watkins and Gussie W. Watkins and secured by a deed of trust to William L. Bondurant, trustee.

On May 1, 1975, the $ 915,663.05 note payable to R. G. and Gussie W. Watkins was replaced by two promissory notes payable to them. The first note, in the amount1981 U.S. Tax Ct. LEXIS 96">*100 of $ 388,000, was secured by a deed of trust on 97 acres of South Arlington property. The second note, in the amount of $ 527,663.05, was secured by a deed of trust on 116.423 acres of property owned by South Arlington. On May 1, 1975, the $ 1,000,348.65 wraparound promissory note payable to Gifford Touchstone was also replaced by two promissory notes payable to Gifford Touchstone: one for $ 419,308 secured by a deed of trust on the 97 acres of South Arlington property and another note for $ 570,240.65 secured by a deed of trust on the 116.423 acres of South Arlington property. South Arlington's personal (as distinguished from nonrecourse) liability extended only to interest payments of $ 9,497.31 on the $ 419,308 note, and $ 12,915.95 on the $ 570,240.65 note. During 1976, South Arlington made a payment of $ 22,413.26 to satisfy this personal liability for interest. After this interest payment was made, neither the partnership nor any of the partners were 77 T.C. 113">*115 personally liable for the indebtedness outstanding against the property.

On December 3, 1976, petitioner sent a letter to the general partner of South Arlington stating that he abandoned his interest in the venture1981 U.S. Tax Ct. LEXIS 96">*101 as of that date. The letter states:

I herewith abandon all of my right, title and interest in and to the South Arlington Joint Venture, effective this date.

At that time, South Arlington had nonrecourse liabilities of $ 989,549. The venture continued to be engaged in business after petitioner's withdrawal.

On their 1976 Federal income tax return, petitioners claimed an ordinary loss of $ 14,865.30 on the abandonment of his interest in South Arlington. Respondent determined that the loss was a capital loss rather than an ordinary one. The parties do not dispute the existence or amount of the loss but only its characterization.

OPINION

Briefly summarized, the evidence shows that petitioner was a partner with a 10-percent interest in a joint venture or partnership which acquired real estate by giving nonrecourse notes secured by vendor's liens and deeds of trust. In 1976, petitioner sent a letter to the general partner stating, "I herewith abandon all of my right, title and interest" in the partnership and, in his income tax return for that year, claimed an ordinary loss deduction as a result of the abandonment of his partnership interest. Respondent determined that the loss 1981 U.S. Tax Ct. LEXIS 96">*102 was deductible only as a capital loss. Based on the interplay between sections 752(b), ¹731(a)(2), and 741, we conclude that respondent's determination is correct.

The deeds of trust on the property owned by South Arlington secured nonrecourse liabilities. Neither South Arlington nor petitioner assumed any personal liability for the payment of the outstanding notes. All of the partners of South Arlington, including petitioner, are therefore deemed to share in the liabilities reflected by the notes in the determination of their bases for their partnership interests in the same proportion as 77 T.C. 113">*116 they shared the partnership profits. Sec. 752(c); sec. 1.752-1(e), Income Tax Regs.; ²Tufts v. Commissioner, 70 T.C. 756">70 T.C. 756, 70 T.C. 756">770 (1978).

1981 U.S. Tax Ct. LEXIS 96">*103 Section 752(b) provides that "Any decrease in a partner's share of the liabilities of a partnership * * * shall be considered as a distribution of money to the partner by the partnership." Section 731(a)(2)³1981 U.S. Tax Ct. LEXIS 96">*104 provides, inter alia, that a partner shall not recognize a loss upon a distribution from a partnership except upon a distribution in liquidation of a partner's interest where no property other than money and certain other property is distributed. The section further provides that any such loss shall be considered as a loss from the sale or exchange of the partner's partnership interest. Finally, under section 741, ⁴ the loss on the sale or exchange of a partnership interest is considered as a loss on the sale or exchange of a capital asset.

When petitioner terminated his partnership interest by abandoning it, he was relieved of his full share of the partnership's nonrecourse liabilities. As a result of this "decrease" in liabilities, under section 752(b) petitioner is 77 T.C. 113">*117 considered to have received a distribution of money from South Arlington in the amount of his share of the partnership liabilities. Under section 731(a)(2), the deemed distribution liquidated his interest in the partnership and the resulting loss is considered as a loss from the sale or exchange of his partnership interest. Section 741 treats the loss on the sale or exchange of a partnership interest as a loss on1981 U.S. Tax Ct. LEXIS 96">*105 the sale or exchange of a capital asset. Therefore, the loss incurred by petitioner is a capital loss rather than an ordinary loss. Pollack v. Commissioner, 69 T.C. 142">69 T.C. 142, 69 T.C. 142">146-147 (1977); Pietz v. Commissioner, 59 T.C. 207">59 T.C. 207, 59 T.C. 207">218 (1972). ⁵

1981 U.S. Tax Ct. LEXIS 96">*106 Petitioner maintains that capital loss treatment is not required by sections 752(b), 731(a)(2), and 741. Petitioner argues that he was not relieved of any partnership liabilities, that no distribution in liquidation occurred, and that an abandonment of a partnership interest is not a sale or exchange of that interest. Petitioner concludes, therefore, that the abandonment of the partnership interest gave rise to an ordinary loss under section 165. ⁶

Petitioner's first argument is that his share of partnership liabilities was not decreased upon the abandonment of his interest and, therefore, he may not be considered to have received a "distribution" under section 752(b). He argues that, under Texas law, he remained liable for partnership debts and 77 T.C. 113">*118 obligations after his partnership interest was terminated, and that therefore his abandonment1981 U.S. Tax Ct. LEXIS 96">*107 did not relieve him of liabilities.

The parties have stipulated, however, that, when petitioner terminated his interest in the partnership, neither South Arlington nor any of the partners were personally liable for the debt outstanding against the property held by South Arlington. Rather, the debt on that property was entirely nonrecourse and secured only by the property itself. Petitioner had no personal liability with regard to that indebtedness before the termination of his partnership interest and obviously acquired none as a result of the termination. Notwithstanding petitioner's lack of personal liability for any part of this partnership indebtedness, as long as he continued to be a partner he was considered as sharing proportionately with the other partners in such indebtedness for the purpose of determining the adjusted basis of his partnership interest by reason, as pointed out above, of section 752(c), and section 1.752-1(e), Income Tax Regs. Petitioner's abandonment of his partnership interest resulted in a decrease in his share of the partnership liabilities within the meaning of section 752(b), not because he ever had personal liability under State law, but because1981 U.S. Tax Ct. LEXIS 96">*108 he is no longer considered under the applicable Code provisions as sharing in the nonrecourse liabilities of the partnership.

Petitioner also contends that no distribution in liquidation occurred, and that therefore section 731 is inapplicable. Although it is true that petitioner did not receive an actual cash distribution, petitioner is "considered" by virtue of section 752(b) to have received a "distribution of money" when he was relieved of his share of the partnership's nonrecourse debts. Moreover, this "distribution" occurred upon the termination by abandonment of petitioner's partnership interest. Therefore, petitioner is deemed to have received this distribution in liquidation of his partnership interest. ⁷ Sec. 761(d); sec. 1.731-1(a)(2), Income Tax Regs.

Petitioner further argues that an1981 U.S. Tax Ct. LEXIS 96">*109 abandonment does not 77 T.C. 113">*119 constitute a sale or exchange and that therefore the loss is an ordinary loss under section 165. It is clear, however, that as a result of the interplay between sections 752(b), 731(a)(2), and 741, described above, the loss suffered by petitioner is to be treated as a loss on the sale or exchange of a capital asset and thus is a capital loss, and not an ordinary loss. See sec. 165(f).

We add that in two recent cases this Court has held that in certain circumstances an abandonment under State law may be treated as a sale or exchange for Federal income tax purposes. See Arkin v. Commissioner, 76 T.C. 1048">76 T.C. 1048 (1981) (abandonment of interest in a land trust); Freeland v. Commissioner, 74 T.C. 970">74 T.C. 970 (1980) (abandonment by a partnership of real property subject to an encumbrance). Those cases provide additional support for our holding that petitioner's loss was a capital loss. However, because our holding is based upon the explicit statutory provisions governing partnerships, we do not need to decide whether the abandonment of the partnership interest would constitute a sale or exchange without 1981 U.S. Tax Ct. LEXIS 96">*110 regard to those provisions.

Petitioner has cited three cases to support his contention that the loss occurring upon the abandonment of a partnership interest is an ordinary loss. See Hutcheson v. Commissioner, 17 T.C. 14">17 T.C. 14 (1951); Gannon v. Commissioner, 16 T.C. 1134">16 T.C. 1134 (1951); Zeeman v. United States, 275 F. Supp. 235">275 F. Supp. 235 (S.D. N.Y. 1967), affd. and remanded on other issues 395 F.2d 861">395 F.2d 861 (2d Cir. 1968). In 16 T.C. 1134">Gannon v. Commissioner, supra, and 17 T.C. 14">Hutcheson v. Commissioner, supra, a partner in a law firm, who withdrew from his partnership thereby forfeiting the sum he had paid for his interest in the firm, was accorded ordinary loss treatment of his investment. The Court held that the taxpayer in each case sustained a loss which was incurred in his business and not a loss from a sale or exchange. Those cases, however, are inapposite to the case before us. First, there is no suggestion in the facts of those cases that the withdrawing partners were relieved of nonrecourse or other partnership liabilities. Further, those1981 U.S. Tax Ct. LEXIS 96">*111 cases were decided prior to the enactment of the Internal Revenue Code sections under which we have decided this case. See Stilwell v. Commissioner, 46 T.C. 247">46 T.C. 247, 46 T.C. 247">251-252 (1966). Consequently, they do not provide support for petitioner's contentions.

275 F. Supp. 235">Zeeman v. United States, supra, also fails to provide support 77 T.C. 113">*120 for petitioner. In that case, the court specifically found that the taxpayer's partnership interest had become worthless during the taxable year. Moreover, the facts in Zeeman do not indicate that the partnership had nonrecourse liabilities in which the taxpayer no longer shared. In this case, our holding is based upon the fact that petitioner was deemed to have received a distribution in money due to the decrease in his share of the partnership's nonrecourse debt which occurred upon the termination of his partnership interest.

To reflect the foregoing,

Decision will be entered for the respondent.