Stock & Bankrupcy

From: "Peter & Karen Diamond" <diamond@vsi.net>
Subject: Stock & Bankrupcy
Date: Mon, 12 Apr 1999 06:35:43 -0400

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Scott,
Just because the company is in Chapter 11 doesn't mean it is worthless.
This is a tricky are because the IRS specifically wants you to write it off
in the first year you believe it to be worthless.  Sometimes, it may not be
obvious right away that the stock is going to become worthless.
A worthless stock is put on Schedule D with your basis and a sale price of 0
(zero).  They are typically treated as being sold on 12/31 of the year of
worthlessness.  The loss is treated like any other capital loss.
If you can eventually sell the stock after writing it off, you would treat
that gain as if it had a basis of 0 (zero).  The way I see it, this will not
add to your total tax for the transaction.
I had a stock go worthless in 1997 and the bankruptcy case is just ending.
It depends on the situation, but individual shareholders are pretty far down
on the list of creditors.  So, unless you really believe the company is
viable in the long term, the safest bet it to write it off as soon as
possible, since you can always sell it and pay the proper tax later.

Peter Diamond
(I am not a tax professional and I don't know all the specifics of your
situation.)


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