Richard L. Matz and Linda A. Matz, Deceased, Richard Lee Matz, Jr., Independent Executor - Page 17

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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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