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Oil Company (Shell) was drilling an oil well in the area.
Petitioner purchased Saddle Mountain on speculation related to
the drilling of the Shell oil well.
After the oil well was drilled and tested, Shell plugged and
abandoned it as a dry hole. In 1987, petitioner abandoned Saddle
Mountain as worthless but did not dispose of title to the mineral
interest.
Losses from sales or exchanges of capital assets are allowed
only to the extent allowed in sections 1211 and 1212. Sec.
165(f). A "capital asset" is defined as property held by the
taxpayer (whether or not connected with his trade or business),
subject to certain enumerated exceptions. Sec. 1221.
There must be a "sale or exchange" of a capital asset in
order for the transaction to be taxed as a capital gain or loss.
Sec. 165(f). Our analysis, therefore, is not directed at whether
petitioner was in a trade or business with respect to Saddle
Mountain, but whether there was a "sale or exchange".
As the Court stated in La Rue v. Commissioner, 90 T.C. 465,
483 (1988), "The touchstone for sale or exchange treatment is
consideration." Therefore, if property merely becomes worthless,
the loss does not arise from a sale or exchange within the
meaning of section 1211, and is thus ordinary in character.
Furthermore, if a taxpayer abandons worthless property, the
abandonment does not constitute a sale or exchange within the
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