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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
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Experience:  15years with H & R Block. Divisional leader, Instructor
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I have shares of a company that is listed on the stock exchange

Customer Question

I have shares of a company that is listed on the stock exchange for less than a penny per share. The company has disappeared. we can't find anyone related to the company. But, the IRS says that the shares are not worthless, so I cannot take a loss. A quote from the certificates is "The shares represented by this certificate are transferrable only on the stock transfer books of the corporation". But the company cannot be found. How do I take a loss for these worthless shares? A. J. XXXXX

Submitted: 1 year ago.
Category: Tax
Expert:  WebCPA replied 1 year ago.
Welcome and thank you for your question. I'll do my best to provide an informative answer. Please let me know if you need any clarification.

You have the option to abandon the security and take a capital loss. The security is treated has having been sold on the last day of the year for $0 (zero). Per the IRS, "To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it."

The loss should be reported on Form 8949 (ultimately ends up on the Schedule D). Write "worthless" in the appropriate column of the Form 8949.

Keep in mind you can use capital losses to offset your capital gains, but to the extent the losses exceed gains, capital losses are limited to a maximum of a $3,000 per year. The remaining capital loss will carry to the next year and you can continue to use $3,000 per year until it is gone.

I hope this helps and thank you for using this service!

Kind regards
Customer: replied 1 year ago.

2 Things:


 


1st: But, the IRS told me that they are not deemed worthless since they are still listed on the Exchange.


2nd: If I follow your advice, then they can only be taken to offset capital gains, not distributions from my IRAs.


 


Thanks

Expert:  WebCPA replied 1 year ago.
Greetings,

Based on your second point it sounds as if these shares are held in your IRA. Unfortunately, you cannot take a capital loss on shares held in your IRA (sorry to be the bearer of bad news). Gains, losses and earnings within an IRA are a non-event from a tax standpoint because it is the distributions that trigger a taxable event. Thus, if you were to surrender your rights to the stock and claim them worthless you would receive no tax benefit. Since you receive no tax benefit in surrendering your rights to the stock, I would recommend you simply hold them indefinitely. It's like holding a lottery ticket in the small chance the company makes a comeback.
Customer: replied 1 year ago.

No, they are NOT held in a IRA. I meant that when I take my RMD for the year, I have a tax liability. I was hoping to use the stock loss to offset the extra income. You said that they can ONLY be used to offset non IRA capital gains, not IRA income. Is that correct?


 


Next, How do you explain your opinion against what the IRS told me of them not being worthless since they are still listed on the Stock Exchange?


 


And, if I can claim them as worthless, How do I go about abandoning & permanently relinquishing all rights"? Do I Send them somewhere or burn the or what?

Customer: replied 1 year ago.
Relist: Incomplete answer.
Expert:  Robin D. replied 1 year ago.

Hello and thank you for using Just Answer, If the stock is even worth less than a penny per share, it is not worthless. You can't take a capital loss deduction on your income tax return for an investment that still has value, even if the remaining value is vastly lower than the original value. Even if you could claim it was worthless, you would still not be able to use more than $3000 a year (if you have no gains to deduct against). Depending on how much you are receiving from your IRA that may not help as much as you would like. If you do not wish to hold this low valued asset then you could sell. That way you have a specific date for showing the loss. You would still not be able to receive much help on the IRA distribution but under your first points you were not going to get that anyway.

 

 

You asked about how to abandon a stock or security:

(i) Abandonment of securities—(1) In general. For purposes of section 165 and this section, a security that becomes wholly worthless includes a security described in paragraph (a) of this section that is abandoned and otherwise satisfies the requirements for a deductible loss under section 165. If the abandoned security is a capital asset and is not described in section 165(g)(3) and paragraph (d) of this section (concerning worthless securities of certain affiliated corporations), the resulting loss is treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset. See section 165(g)(1) and paragraph (c) of this section. To abandon a security, a taxpayer must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for the security. For purposes of this section, all the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift.

 

What that actually means is the stock is worthless and the taxpayer says that's it, I give up on ever thinking it will come back. So they give teh stock back to teh company that issued.

 

But

The stock has to be worthless to abandon it and the issuing company takes it back without the taxpayer expecting to get any compensation at all for it .

 

Customer: replied 1 year ago.

That's all fine & good, but I can't give it back to the company, because the company cannot be found. There are no people associated with the company that can be found.


Then, the IRS was right, since the stock has a value on the Exchange, it cannot be deemed worthless. Is that correct?


 


Also, They are the type of shares that cannot be sold on the open market. According to the writing on the shares, they can only be signed by the company attorney (who cannot be found).


 


Do I have any other alternative other than eating the loss?

Expert:  Robin D. replied 1 year ago.
"Then, the IRS was right, since the stock has a value on the Exchange, it cannot be deemed worthless. Is that correct?"
Unfortunately yes.


Sell the stock and then claim your loss. Without a clear cut sell you can not claim the loss.

I understand you would like to be done with the stock you are holding and in the real world, less than a penny is worthless, but I remember when K-mart went to 2 cents a share, then they came back.
Expert:  WebCPA replied 1 year ago.

Greetings, One other idea you may try. Many brokerage houses (TD Ameritrade, etc.) will "buy" back your worthless shares even if they are not able to be traded. It essentially transfers the shares out of your name, relinquishing your rights to them and thus constituting a sale. They typically won't pay you more than $1 for the shares and it will usually cost you the price of a trade - typically less than $10. So for $10 out of your pocket to take the capital loss it might be worth it. I would recommend you check with the company that houses your portfolio and see if they can do this. If they can't, you might be able to transfer them into another trading account with a company that will do this.

Customer: replied 1 year ago.


TD Ameritrade & Morgan Stanley have already refused the shares, because they can only be turned over to a non existing company. Can I sell them to a person on the street, a relative or anyone for a penny?

Expert:  WebCPA replied 1 year ago.
I would certainly try that. Ask the broker if the shares can be transferred to an account in another person's name. If so, you could draft a sales agreement selling them for a penny and have the shares transferred to another individual's account.
If they can't be transferred to another person, ask what happens if these shares are the only shares in your account and you close the account. There must be some procedure at the broker whereby the shares are liquidated or surrendered if not liquid upon closing the account. There must be some way to surrender them.
Customer: replied 1 year ago.

I just talked to my broker. He said that the stock shows a zero value. He tried to sell some of the same shares in another account, but could not because they are listed at $0.00 per share. Not even a penny. Does this make them "worthless" since they do not have a value on the Exchange?

Expert:  Robin D. replied 1 year ago.
Hi again,
You must show the following in order to take the tax deduction on your tax return:

The securities became totally worthless in 2013. You must be able to reasonably fix the date they became worthless, such as the date the company stopped doing business or the date the value showed in the exchange; and
The securities had some value in 2012(you said they were worth less than a penny).
It is not required that you show this on your return but that you retain the information in your records in case the IRS were to ask in the future.
This is still a capital loss and would not be count fully unless you also had capital gains so you may expect to have a carry over under the capital loss rules.

If by some chance they are not worthless you would file an amended return for the year you claim the loss.
Just to restate, generally, a security is considered worthless at the time it first has no liquidation value, and no reasonable hope or expectation exists that the security will become valuable at some future date. A taxpayer may be able to establish worthlessness by showing a fixed and identifiable event demonstrating the worthlessness of the security.

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