The facts here show that Bardo, acting through Millionaire, refused to turn the negative over to Burge after he had 97 T.C. 200">*208 made demand for it. Millionaire, however, was the executive producer, responsible for below-line expenses, and possessed certain distribution rights regarding the movie. Additionally, the pleadings in the lawsuit between Burge and Bardo do not focus solely on ownership, but upon who was entitled to certain of the distribution rights. Finally, the California State court ordered that Bardo turn over a negative to Burge, but that Bardo would be entitled to retain a negative (duplicate original).

Based upon those facts, respondent argues that petitioners have failed to show that a theft and/or an embezzlement occurred under California law. Petitioner counters that this case is similar to Sammons v. Commissioner, T.C. Memo. 1986-318,1991 U.S. Tax Ct. LEXIS 71">*87 affd. in part and revd. in part on other issues 838 F.2d 330">838 F.2d 330 (9th Cir. 1988). In Sammons v. Commissioner, supra, embezzlement under California law was considered in connection with the taxpayer's payment of $ 12,000 to an individual for a horse which was never delivered to the taxpayer. Petitioner argues that we should draw an inference from the facts of this case that Bardo intended to unlawfully deprive Vandom of its property and that Bardo had converted the property to his own use. Respondent counters that the facts of this case are distinguishable from those in Sammons. We agree with respondent. In Sammons, the taxpayer's unsuccessful efforts to find and/or successfully sue the embezzler-seller supported the conclusion that the appropriation constituted an embezzlement. In this case, petitioner's partnership had turned the negative over to Millionaire for an agreed purpose and Millionaire had certain distribution rights concerning the movie. Millionaire's refusal was not equivalent to the embezzler's actions in Sammons and we so hold.

Abandonment Loss

Having decided that petitioners did not show that there had 1991 U.S. Tax Ct. LEXIS 71">*88 been a theft or embezzlement under California law, we next consider whether petitioner abandoned his partnership interest during the 1981 taxable year and, if he did, the amount of his loss and whether it is ordinary or capital.

To be entitled to deduct an abandonment loss under section 165, a taxpayer must show: (1) An intention on the 97 T.C. 200">*209 part of the owner to abandon the asset, and (2) an affirmative act of abandonment. United States v. S. S. White Dental Manufacturing Co., 274 U.S. 398">274 U.S. 398, 71 L. Ed. 1120">71 L. Ed. 1120, 47 S. Ct. 598">47 S. Ct. 598 (1927); A. J. Industries, Inc. v. United States, 503 F.2d 660">503 F.2d 660, 503 F.2d 660">670 (9th Cir. 1974); CRST, Inc. v. Commissioner, 92 T.C. 1249">92 T.C. 1249, 92 T.C. 1249">1257 (1989), affd. 909 F.2d 1146">909 F.2d 1146 (8th Cir. 1990).

In determining a taxpayer's intent to abandon, the "subjective judgment of the taxpayer * * * as to whether the business assets will in the future have value is entitled to great weight and a court is not justified in substituting its business judgment for a reasonable, well-founded judgment of the taxpayer." 503 F.2d 660">A. J. Industries, Inc. v. United States, supra at 670. Here, respondent does not dispute the fact that petitioners may 1991 U.S. Tax Ct. LEXIS 71">*89 have formed an intent to abandon the partnership interest. Respondent places emphasis on the argument that petitioners have failed to show an affirmative act of abandonment during 1981. Petitioners counter that the record does reflect affirmative acts of abandonment. Specifically, petitioner points out that he told Burge at the December 1981 meeting that he would not provide additional money to the partnership and that he would not become involved in the making of an X-rated film. Petitioner also stated to Burge that he would not have anything further to do with the partnership and the movie. Petitioner also refers us to the fact that the limited partners voted to dissolve ⁵ the partnership at the December 1981 meeting. Thereafter, Burge told the accountant to file the final partnership return for the period ending December 31, 1981.

1991 U.S. Tax Ct. LEXIS 71">*90 Little has been written concerning the abandonment of a partnership interest.⁶Tangible property is capable of physical abandonment, but abandonment of a partnership interest (an intangible property interest) should be accompanied by some express manifestation. Considering the passive 97 T.C. 200">*210 nature of a limited partnership interest, the need to manifestly express the intent to abandon is especially important. See, e.g., Dycus v. Belco Industries, Inc. 569 P.2d 553">569 P.2d 553, 569 P.2d 553">555 (Okla. Ct. App. 1977). California has adopted the Uniform Limited Partnership Act, and Cal. Corp. Code sec. 15518 (West 1977) defines a limited partnership interest as "personal property." We could find no reason to treat this personal property ⁷ differently from other types of personal property. In Echols v. Commissioner, 935 F.2d 703">935 F.2d 703 (5th Cir. 1991), revg. 93 T.C. 553">93 T.C. 553 (1989), the Circuit Court held that a partner could and did abandon his partnership interest for Federal tax purposes. In so holding, it was pointed out that neither Texas State law nor the Internal Revenue Code or underlying regulations specified physical methods or legal procedures for abandoning1991 U.S. Tax Ct. LEXIS 71">*91 an interest in a partnership. Accordingly, we proceed to decide whether petitioner abandoned his limited partnership interest during 1981.

An affirmative act to abandon must be ascertained from all the facts 1991 U.S. Tax Ct. LEXIS 71">*92 and surrounding circumstances, United California Bank v. Commissioner, 41 T.C. 437">41 T.C. 437, 41 T.C. 437">451 (1964), affd. per curiam 340 F.2d 320">340 F.2d 320 (9th Cir. 1965), and "the Tax Court [is] entitled to look beyond the taxpayer's formal characterization." Laport v. Commissioner, 671 F.2d 1028">671 F.2d 1028, 671 F.2d 1028">1032 (7th Cir. 1982), affg. a Memorandum Opinion of this Court. "The mere intention alone to abandon is not, nor is non-use alone, sufficient to accomplish abandonment." Beus v. Commissioner, 261 F.2d 176">261 F.2d 176, 261 F.2d 176">180 (9th Cir. 1958), affg. 28 T.C. 1133">28 T.C. 1133 (1957).

Respondent relies on two cases in support of his argument that petitioners have failed to show an affirmative act of abandonment during 1981. In A.J. Industries, Inc. v. United States, 503 F.2d 660">503 F.2d at 674, the U.S. Court of Appeals for the Ninth Circuit held that an "option to salvage, which might never have been exercised" was insufficient to reflect 97 T.C. 200">*211 an affirmative act of abandonment. Instead, that court held that the abandonment occurred in the next year when the option was exercised. In this case, however, petitioner, as a limited partner, told Burge, who1991 U.S. Tax Ct. LEXIS 71">*93 was president of Vandom's general partner that he would not come up with additional funds and would have nothing further to do with the partnership and movie. Thereafter, petitioner, along with the other three limited partners, agreed to dissolve the partnership. After that point in 1981, Burge pursued the X-rated movie through another entity and pursued legal action against Bardo and his company. Petitioner did not have any further dealings with, had no expectations to receive anything, and received nothing from Vandom or Burge after December 1981.

Respondent also relied upon Echols v. Commissioner, 93 T.C. 553">93 T.C. 553, but that case was reversed by the Court of Appeals for the Fifth Circuit on July 15, 1991, after completion of the briefing in this case. In that case the taxpayer was a 37.5-percent partner in a partnership which had (as its sole asset) undeveloped real property purchased in anticipation of an adjacent highway project. After the highway project stalled due to local opposition and the real estate market went into a slump, another 37.5-percent partner transferred his interest to the taxpayer in exchange for the taxpayer's assumption of the recourse1991 U.S. Tax Ct. LEXIS 71">*94 debt outstanding on the realty. The remainder of the debt was nonrecourse. The taxpayer and the remaining 25-percent partner attempted to and finally sold a 50-percent interest in the realty to a third party who defaulted on his payment after a little more than one year. Thereafter, the taxpayer met with the 25-percent partner and informed him that he would no longer make payment of his 75-percent portion of the mortgage and taxes. The taxpayer also offered to convey his interest to anyone who would assume his portion of the partnership debt. At that time, the value of the realty had declined to less than the mortgage balance. The taxpayer did nothing more during that year and claimed a capital loss. The next year the mortgagees foreclosed on the realty. Under those facts, we held that there was a failure to manifest abandonment through some act apparent to those outside the partnership, as distinguished from the case of 97 T.C. 200">*212 Middleton v. Commissioner, 77 T.C. 310">77 T.C. 310, 77 T.C. 310">322 (1981), affd. per curiam 693 F.2d 124">693 F.2d 124 (11th Cir. 1982). See Echols v. Commissioner, 93 T.C. 553">93 T.C. 555-558. The Court of Appeals for the Fifth Circuit, however, 1991 U.S. Tax Ct. LEXIS 71">*95 held that abandonment should not be viewed solely from a partnership perspective and that the taxpayer's actions were sufficient to constitute an abandonment of his partnership interest during 1976. Echols v. Commissioner, 935 F.2d 703">935 F.2d 703 (slip op. at 4816-4817). There is no requirement that a taxpayer relinquish title in order to establish a loss if such "loss is reasonably certain in fact and ascertainable in amount." Middleton v. Commissioner, 77 T.C. 310">77 T.C. 322.

In this case, the partners borrowed the money necessary to produce the movie, and they were personally obligated to pay the debt even if no movie or asset was ever in existence. In other words, there were no interested parties, such as mortgagees, to whom to manifest the abandonment. The limited partners here voted to dissolve and abandon the interest or rights that they may have had in the negative. They were not interested in participating in the conversion of the working print into an X-rated movie, and petitioner communicated to the general partner that he no longer had any interest in the partnership or the movie. Based upon those events and that communication, Burge proceeded1991 U.S. Tax Ct. LEXIS 71">*96 (without the financial assistance or involvement of petitioner) to make an X-rated movie and to pursue through legal action the negative held by Bardo and his company. We find the facts of this case to be distinguishable from those in the cases cited by respondent. ⁸ Here, petitioner manifested his intent to abandon by an overt act of abandonment to the parties in interest (the general partner 97 T.C. 200">*213 and all limited partners). Burge proceeded to close down the partnership (directing that a final partnership return be filed) and to treat the movie and the rights to it as no longer belonging to the limited partners, including petitioner.

1991 U.S. Tax Ct. LEXIS 71">*97 Having found that petitioner abandoned his interest in the partnership as of the end of 1981, we must now decide whether the loss is capital or ordinary. If petitioner's loss is from the sale or exchange of a capital asset, the amount of capital loss allowable for the taxable year is the lower of $ 3,000 or the excess of capital losses over capital gains. Secs. 165(f), 1211, and 1212(b). If, on the other hand, the loss is ordinary, the limitation of section 1212(b) would not be applicable.

Although partnership interests are property and should be subject to the abandonment principles in the same manner as any other property, some distinctions have been made and commentary ⁹ expressed concerning whether the abandonment of a partnership interest should or could result in an ordinary loss. Because subchapter K generally provides for sales, exchanges, and other dispositions of partnerships and partnership interests, it has been suggested that some potential for overlap may exist between subchapter K and section 165.

1991 U.S. Tax Ct. LEXIS 71">*98 This Court, in the context of the Internal Revenue Code of 1939, has decided that abandonment (forfeiture) of a partnership interest was not a sale or exchange and could be accorded ordinary (rather than capital) loss treatment. Gannon v. Commissioner, 16 T.C. 1134">16 T.C. 1134, 16 T.C. 1134">1139 (1951); Hutcheson v. Commissioner, 17 T.C. 14">17 T.C. 14 (1951). No changes were made in the loss provisions of the Internal Revenue Code of 1954 which would dictate a change in the case precedent under the 1939 Code. There is limited precedent, in other courts, under the Internal Revenue Code of 1954 that the worthlessness of a partnership interest (a capital asset) may result in an ordinary loss. Zeeman v. United States, 275 F. Supp. 235">275 F. Supp. 235, 275 F. Supp. 235">253 (S.D.N.Y. 1967), affd. and remanded on other issues 395 F.2d 861">395 F.2d 861 (2d Cir. 1968).

97 T.C. 200">*214 We have addressed several post-Internal Revenue Code of 1954 cases where taxpayers were found to have capital losses because they were relieved of liabilities by means of their abandonment resulting in a sale or exchange. See, for example, Freeland v. Commissioner, 74 T.C. 970">74 T.C. 970, 74 T.C. 970">982-983 (1980), and Middleton v. Commissioner, 77 T.C. 310">77 T.C. 310, 77 T.C. 310">319-324 (1981),1991 U.S. Tax Ct. LEXIS 71">*99 affd. per curiam 693 F.2d 124">693 F.2d 124 (11th Cir. 1982). More specifically, in a partnership setting we held that a decrease in a taxpayer's individual liabilities by reason of the assumption of debt by the partnership can constitute a deemed distribution under section 752(b). ¹⁰O'Brien v. Commissioner, 77 T.C. 113">77 T.C. 113, 77 T.C. 113">118-120 (1981). In that case it was reasoned that distributions deemed as such were sales or exchanges of a partnership interest within the meaning of section 731(a), resulting in capital gain or loss pursuant to section 741.

Respondent argues in this case that if we find that petitioner abandoned his partnership interest during 1981, such abandonment resulted1991 U.S. Tax Ct. LEXIS 71">*100 in a sale or exchange within the meaning of section 741 because the partnership had a $ 3,560 liability at the end of its taxable year.

Petitioner counters that respondent is in error concerning the $ 3,560 liability. Petitioner points out that the $ 3,560 liability only appears as an opening balance on the balance sheet on Vandom's final return (Form 1065 for the 1981 year) and that no liabilities are reflected for the partnership as of the close of the 1981 year. The certified public accountant for Vandom testified and confirmed that there were no liabilities in reference to the limited partners. Because respondent has incorrectly interpreted the facts, his argument on this point must fail because there was no debt to be assumed by the partnership. It is also noted that the partnership return at the beginning of the 1981 year reflected deferred distribution costs and expenses in the amount of $ 3,560 as an asset. It would not be unreasonable to assume that the deferred expenses had been carried over from 1980 year-end operations, and that the deferral was reversed and the liability paid early in the 1981 year.

97 T.C. 200">*215 Respondent also argues that the abandonment would be a sale or1991 U.S. Tax Ct. LEXIS 71">*101 exchange because petitioner may have received the benefit of an interest payment, during 1981, regarding his loan with Crocker National Bank. Although the record is not clear whether any such payments were made on petitioner's behalf during 1981, these payments, if made, were not made in liquidation of or exchange for petitioner's interest in Vandom or at the time of abandonment.

It is clear, however, that petitioner was not directly or constructively paid any amount for his partnership interest in Vandom as of the end of the 1981 taxable year. Accordingly, we must decide whether abandonment of a partnership interest (where there are no liabilities owed by the partnership) would result in ordinary loss under post-1939 versions of the Internal Revenue Code. ¹¹

1991 U.S. Tax Ct. LEXIS 71">*102 We have not, under the 1954 or later versions of the Internal Revenue Code, decided whether abandonment of assets (including partnership interests), where no partnership liabilities exist, results in ordinary, rather than capital, loss. See Stilwell v. Commissioner, 46 T.C. 247">46 T.C. 247, 46 T.C. 247">252 n.3 (1966). It is noted that Stilwell involved a liquidation of a two-man partnership where we found no terminology had been used to indicate that a sale or exchange had occurred.

The effect of liabilities was touched upon in La Rue v. Commissioner, 90 T.C. 465">90 T.C. 465, 90 T.C. 465">482-483 (1988), where we stated:

Losses allowed by section 165 may be either ordinary or capital in character. Section 1222 defines a capital loss as a loss from the sale or exchange of a capital asset. A partnership interest is a capital asset under section 741. We must determine whether an actual or constructive sale or exchange occurred here.

The touchstone for sale or exchange treatment is consideration. If, in return for assets, any consideration is received, even if nominal in amount, the transaction will be classified as a sale or exchange. * * *

Respondent's argument here follows1991 U.S. Tax Ct. LEXIS 71">*103 the above-quoted principle, but then goes further by reference to Rev. Rul. 76-189, 1976-1 C.B. 181. That ruling expresses the view that 97 T.C. 200">*216 even where a partnership has no assets or liabilities at termination, any loss of a partner is subject to section 731 and results in capital loss. ¹²1991 U.S. Tax Ct. LEXIS 71">*104 There are no cases which support this view and we treat respondent's rulings merely as the position of a party. Estate of Lang v. Commissioner, 613 F.2d 770">613 F.2d 770 (9th Cir. 1980), affg. in part, revg. in part 64 T.C. 404">64 T.C. 404 (1975) (Court-reviewed). Section 731 is specifically concerned with "Recognition of Gain or Loss on Distribution." (Emphasis supplied.) Because section 731 concerns distributions and literally requires a distribution to be operative, respondent, in the ruling, treats the transaction as though an actual distribution had taken place. ¹³

No rationale or support ¹⁴ is provided in the ruling for the supposition deeming the existence of a distribution for purposes of section 731. In order to decide1991 U.S. Tax Ct. LEXIS 71">*105 this case under the theory used by respondent in the ruling, we would be compelled to impute a sale or exchange, even though none had occurred. This we decline to do. Section 165 losses are not limited to certain types of assets, and sections 701 through 761 are not literally exclusive for purposes of abandonment. Section 752(b), for example, may come into play in situations where abandonment results in a decrease in a partner's liabilities. That section deems such an event to constitute a "distribution of money to the partner * * *." In that event, the case precedent, sections 731 and 741, and 97 T.C. 200">*217 other considerations may result in capital gain or loss due to abandonment of a partnership interest.

1991 U.S. Tax Ct. LEXIS 71">*106 Accordingly, petitioners are entitled to ordinary loss treatment with respect to the abandonment of the Vandom partnership interest during 1981.

Basis of Partnership Interest - Amount of Loss

Next, we consider whether petitioner's basis in his limited partnership interest was $ 60,000 or some lesser amount attributable to distributions from Vandom. The evidence in the record on this point is somewhat contradictory and unclear. On one hand, the partnership was to pay petitioner's interest payments out of "profits" and an accounts receivable established for any such payments. Vandom had no profits and it is not clear that the accounts receivable ¹⁵ on the books at the beginning of 1981 were for this purpose. On the other hand, evidence was offered indicating that on one occasion a check had been provided to petitioner to cover an interest payment on his $ 60,000 loan from Crocker National Bank. The document is undated and does not specify any dates or the frequency of such activity. Petitioner testified that he did not recall receiving any distributions from Vandom and respondent argues, but did not prove, that Burge told respondent's agent that interest had been paid1991 U.S. Tax Ct. LEXIS 71">*107 on the limited partners' loans.

Petitioner bears the burden of showing his adjusted basis for purposes of establishing the amount of his loss from abandonment of the limited partnership interest. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933); Rule 142(a). In the face of evidence reflecting that some payment had been made to petitioner concerning interest and the possibility that a portion of the accounts receivable on Vandom's books represented such payments, petitioner should have offered evidence to show that1991 U.S. Tax Ct. LEXIS 71">*108 no such payments or distribution were made. Such evidence would have been available in the form of Vandom's records, and we presume that such 97 T.C. 200">*218 evidence would be unfavorable to petitioner if adduced. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1158, 6 T.C. 1158">1165 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947).

The earlier quarterly interest payments due on petitioner's loan from Crocker National Bank approximated $ 3,000. Vandom's accounts receivable at the beginning of 1981 approximated $ 24,000. ¹⁶ With four limited partners, it is reasonable to expect that one-fourth of the receivable would have been attributable to petitioner. We accordingly find that petitioner, early in his relationship with Vandom, received two quarterly interest amounts totaling $ 6,000. Although petitioner was not liable to repay the interest because it was eventually to be taken out of Vandom's profits, these amounts are distributions within the meaning of subchapter K, but they were not likely made during 1981. These distributions would cause a reduction of petitioner's basis and result in an adjusted basis of $ 54,000. Secs. 705(a) and 733. In view of the foregoing, 1991 U.S. Tax Ct. LEXIS 71">*109 we hold that petitioners are entitled, in their 1981 taxable year, to deduct a $ 54,000 ordinary loss from abandonment of their Vandom limited partnership interest.

Petitioners had also raised an issue concerning whether they should have recaptured a $ 6,000 investment tax credit. Petitioners conceded that issue on brief if we should find that they are entitled to an ordinary loss. Additionally, it is not necessary to consider the addition to1991 U.S. Tax Ct. LEXIS 71">*110 tax under section 6653(a). The sole adjustment giving rise to the deficiency in this case was the disallowance of petitioners' claimed ordinary loss. Due to our holding on that issue and the absence of any significant amount of deficiency or underpayment which could be attributable to "negligence," we find that petitioners are not liable for the addition to tax under section 6653(a).

97 T.C. 200">*219 To reflect the foregoing,

Decision will be entered under Rule 155.

Even while reversing our opinion in 935 F.2d 703">Echols v. Commissioner, supra -- with the explanation that, in its opinion, we focused too much on the actions of the partnership, rather than on the actions of the partner-taxpayer claiming the abandonment loss -- the Fifth Circuit in 935 F.2d 703">Echols v. Commissioner, supra, noted that the taxpayers therein made a --

clear and unequivocal indication to * * * [the other partners] and the world that * * * [they] were "walking" from their ownership interest in the Partnership. And they kept that vow, never thereafter to return to acts of ownership toward or contributions to the Partnership. [Echols v. Commissioner, 935 F.2d 703">935 F.2d 703 (slip op. at 10).]

As an additional element of the taxpayer's burden of proof, the taxpayer must also establish that the underlying transaction or events (on which the alleged abandonment 97 T.C. 200">*221 loss is based) did not, in fact, represent or involve a distribution, a dissolution and liquidation, or a sale or exchange. Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287, 90 L. Ed. 78">90 L. Ed. 78, 66 S. Ct. 120">66 S. Ct. 120 (1945); Commissioner v. Houston, 283 U.S. 22351">283 U.S. 22351 S. Ct. 413, 75 L. Ed. 991">75 L. Ed. 991 (1931); 90 T.C. 465">La Rue v. Commissioner, supra;1991 U.S. Tax Ct. LEXIS 71">*114 77 T.C. 310">Middleton v. Commissioner, supra; 77 T.C. 113">O'Brien v. Commissioner, supra; 74 T.C. 970">Freeland v. Commissioner, supra; Pallan v. Commissioner, T.C. Memo. 1986-76.

In regard specifically to petitioner's burden of proof in this case, a review of the record herein indicates that petitioner (contrary to his alleged 1981 abandonment) claimed a continuing ownership interest in Vandom not only on his 1981, but also on his 1982 and his 1983 Federal income tax returns, each of which was prepared by an accountant. Also, the findings of fact set forth in the majority opinion do not adequately establish express affirmative acts of abandonment by petitioner with regard to his interest in Vandom.

I respectfully suggest that the abandonment loss claimed in this case should be disallowed on the ground either that in conjunction with the termination of petitioner's interest in Vandom a sale or exchange, or a distribution to petitioner, occurred, or on the ground that petitioner has failed to satisfy his burden of proving that he abandoned his partnership interest in Vandom in 1981.