Worthless Stock

[geekgirldany]

I have a client that purchased stock through the company's Employee Stock Purchase Plan. The company (PMI Group) is now in chapter 11 bankruptcy. From reading some messages on stock forums the company was taken over by Arizona Dept of Ins. I believe they are trying to reorganize into another company.

In the meantime the stock is trading at 2 cents. Client has about $12,000 cost into the stock.

What is the best advice in this situation?
Tell him to see if he can sell the stock for a $1? Or hold on to it until it becomes totally worthless?

I was reading a stock blog that said selling the stock for $1 could cost more than the deduction and all purchases would have to separated out. So not sure.

Would appreciate any input.
Thank you
Dany

[ChEAr$]

since the company is NOW in chapter 11, it's not yet worthless.

Anything that happens in 2012 will impact the value.

[BOB W]

Client could return the stock to the company and treat it as a abandoment, thus take the loss on 2012 return.

[DMICPA]

Stock

If the stock is sold, the loss becomes deductible upon sale. Sometimes it is difficult to sell the stock. An abandonment letter to the Company would also yield a loss on disposition.

[geekgirldany]

Thank you all for responding. I will tell the client and hopefully his broker will help him make a choice.

[Gary2]

I was reading a stock blog that said selling the stock for $1 could cost more than the deduction and all purchases would have to separated out. So not sure.

I wouldn't separate out all of the purchases, just divide them into short term and long term. As long as the date of the sale or other disposition is the same date, and the basis is accurate, you can report the purchase date as "various".

[Roberts]

The client can have the broker generate a "dollar write-off letter". They'll remove the shares from his account and credit him $1 for the shares. That way it shows up on the 1099.

If he has a certificate (highly unlikely), just take the loss. (I'd print out something indicating the bankruptcy reorg). If by some miracle the shares become of value later, you can sell them and take 100% of the proceeds as a gain.

[geekgirldany]

Thank you all again. Client decided that he will keep the stock for one more year to see what happens in the reorganization. I know now what to do in the future when this comes up again.

[FEDUKE404]

No sale allowed?

The client can have the broker generate a "dollar write-off letter". They'll remove the shares from his account and credit him $1 for the shares. That way it shows up on the 1099.

If he has a certificate (highly unlikely), just take the loss. (I'd print out something indicating the bankruptcy reorg). If by some miracle the shares become of value later, you can sell them and take 100% of the proceeds as a gain.

I have seen this "$1 sale" approach used several times in the not-so-distant past.

However, within the last couple of years, I was told the firm could no longer do that. The "best" they could offer would be a boilerplate letter issued, after some predetermined time frame, stating that a market for the stock no longer exists. They did issue such a letter....eventually....and IIRC it was treated as a 12/31/20xx disposition.

You may wish to pursue this possibility further.

FE