Worthless stock transaction


D

Dick Adams

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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P

Paul Thomas

Dick Adams said:
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.
 
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I

Ira Smilovitz

Dick Adams said:
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
 
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H

Harlan Lunsford

Dick said:
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
 
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B

Bill

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.")
[elided]
Speaking only to the estate question, wouldn't the simple
answer be that the stock is worthless, and should not be
counted as an asset?

My logic is that all assets get stepped-up -- or otherwise
adjusted -- in value, based on their worth as of the death
of the owner. So the adjusted value as of this woman's
death would be the only estate issue, and clearly that is
"nothing."

Am I missing something?

Bill
 
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D

DORFMONT

Dick said:
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?
This is exactly what happened when my father died. He bought
stock in the Stardust Hotel in Las Vegas back in the 50s and
the certificate was still around. I took it to one of his
brokerages and deposited it into his account there. The
brokerage told me the stock was worthless. The E & P
attorneys gave me no trouble about this. I would expect that
the IRS attorneys that look at the 706s would accept any
evidence that the corporation was defunct including a page
out of the corporate register for the state showing no entry
for the corporation in question or showing it suspended or
dissolved.

Linda Dorfmont E.A., CFP, CSA


\\
From: "D.D. Pallmer" <[email protected]>
Subject: Withdrawing from a Non Qualified Variable Annuity Before Age 59 1/2
Newsgroups: misc.taxes.moderated
Approved: (e-mail address removed)
Precedence: first-class
Organization: (none provided)

Two years ago, my uncle was sold a fixed variable annuity.
It paid some teaser interest rate (the bait that Uncle took)
but now is paying a paltry 3.45%. I cannot move the
investment to an equity sub-account or anything like that.
It's stuck at 3.45%. Buying the product was a mistake but
not of major proportions, but I was not consulted at the
time. Anyway, Uncle recently gifted the annuity to me.
Upon transfer of ownership, the insurance company who wrote
it told me that they would 1099 my uncle (next January) for
the earnings to date. Not very much and Uncle is in a low
tax bracket so this is not a problem. Uncle is 88.

There is a lockup period on the annuity where a big penalty
(from the insurance company, in addition to any tax
penalties) hits if you withdraw. Some of the money recently
became unlocked, so I withdrew it. The rest comes unlocked
in a year. I am 47 years old. A few questions:

1. I assume my basis will be what it was on the day of the
gift, since Uncle will be paying taxes on all earnings thru
that date. (?)

2. What is the penalty for me withdrawing all or part of the
annuity before my own age 59 1/2 ? And what form do I report
all of this on? And if one is disabled, is there an
exception to the IRS penalty? And if so, what for do I
report THAT on?

It's just a bad investment that I want to close out as
quickly and as cheaply as possible. I think I need to wait
for the "lockup period" to end at the very least. But even
beyond that, what are the implications of all of this?
 
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A

AK

My was my understanding that stock becomes "worthless" when
you ask your broker to sell it, and they inform you it is
worthless.
 
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S

Seth Breidbart

Ira Smilovitz said:
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
 
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