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Subject Author Date
Worthless stock transaction Dick Adams 06-03-2006
Posted by Dick Adams on June 3, 2006, 9:44 am
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 In 1973, friend of mine issued a stock certificate for 5% of
his C-corp to a vendor in return for a line of credit and an
annual credit of $1,000 for five years. He ran this business
until sometime in the mid-80's and just dropped out of sight.
I spoke with him once in about 1995, but have no idea where
he is today.

The vendor died and her executor found the stock certificate
amongst her papers. My name appeared in her notes because I
was helping my friend set up this transaction. The executor
got my phone number from my friend's brother (who told him I
was now a CPA) and called me yesterday. He asked what I knew
about the value of the stock. That was easy. She paid $5000
for it and it is now worthless.

He wanted to know how to account for it on her estate tax
return. I told him he needed to discuss that with an estate
tax professional. (I refrained from saying "How the hell
would I know.")

For my own knowledge: If you have stock that is worthless
because the company went out of business, do you have to sell
it take the loss, take the loss in the year the company
went out of business, or pick the year you take the loss?

Dick

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Posted by Paul Thomas on June 4, 2006, 12:54 am
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> He wanted to know how to account for it on her estate tax
> return. I told him he needed to discuss that with an estate
> tax professional. (I refrained from saying "How the hell
> would I know.")

I tell clients that I fired my psychic last year because she
wasn't doing a good enough job - she never saw it coming.

> For my own knowledge: If you have stock that is worthless
> because the company went out of business, do you have to sell
> it take the loss, take the loss in the year the company
> went out of business, or pick the year you take the loss?

Take the loss in the year you first because aware that the
stock was worthless.

It'll be a hard battle if the IRS audits. They're going to
claim that it was worthlesss in the 80's and who knows if it
was deducted back then.

--
Paul A. Thomas, CPA
Athens, Georgia

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Ira Smilovitz on June 4, 2006, 12:54 am
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> In 1973, friend of mine issued a stock certificate for 5% of
> his C-corp to a vendor in return for a line of credit and an
> annual credit of $1,000 for five years. He ran this business
> until sometime in the mid-80's and just dropped out of sight.
> I spoke with him once in about 1995, but have no idea where
> he is today.
>
> The vendor died and her executor found the stock certificate
> amongst her papers. My name appeared in her notes because I
> was helping my friend set up this transaction. The executor
> got my phone number from my friend's brother (who told him I
> was now a CPA) and called me yesterday. He asked what I knew
> about the value of the stock. That was easy. She paid $5000
> for it and it is now worthless.
>
> He wanted to know how to account for it on her estate tax
> return. I told him he needed to discuss that with an estate
> tax professional. (I refrained from saying "How the hell
> would I know.")
>
> For my own knowledge: If you have stock that is worthless
> because the company went out of business, do you have to sell
> it take the loss, take the loss in the year the company
> went out of business, or pick the year you take the loss?

You take the loss in the year the stock became worthless.
This may or may not be the same as the year the company went
out of business. You have seven years (not the usual three)
to amend a 1040 return to claim the loss on a worthless
security.

Ira Smilovitz

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Seth Breidbart on June 13, 2006, 10:48 pm
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> You take the loss in the year the stock became worthless.
> This may or may not be the same as the year the company went
> out of business. You have seven years (not the usual three)
> to amend a 1040 return to claim the loss on a worthless
> security.

How long do you have if the security was a small business
(capitalized under $1 million, so subject to a much higher
immediate deduction limit)? What if you deducted it as a
straight capital loss; can you amend to claim the higher
limit for three or seven years?

Seth

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Harlan Lunsford on June 4, 2006, 12:54 am
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Dick Adams wrote:

> In 1973, friend of mine issued a stock certificate for 5% of
> his C-corp to a vendor in return for a line of credit and an
> annual credit of $1,000 for five years. He ran this business
> until sometime in the mid-80's and just dropped out of sight.
> I spoke with him once in about 1995, but have no idea where
> he is today.
>
> The vendor died and her executor found the stock certificate
> amongst her papers. My name appeared in her notes because I
> was helping my friend set up this transaction. The executor
> got my phone number from my friend's brother (who told him I
> was now a CPA) and called me yesterday. He asked what I knew
> about the value of the stock. That was easy. She paid $5000
> for it and it is now worthless.
>
> He wanted to know how to account for it on her estate tax
> return. I told him he needed to discuss that with an estate
> tax professional. (I refrained from saying "How the hell
> would I know.")
>
> For my own knowledge: If you have stock that is worthless
> because the company went out of business, do you have to sell
> it take the loss, take the loss in the year the company
> went out of business, or pick the year you take the loss?

IRS requires either a sale or exchange.

For sake of argument, to whom would you sell it?

If there is no market, then IRS does not require a sale, but
it is really a de facto "exchange" for zero value when
worthless.

ChEAr$,
Harlan

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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