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Sell, abandon, or worthless?

Technical topics regarding tax preparation.
#1
Nilodop  
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No need to click on it, but back in this thread viewtopic.php?f=8&t=25985&hilit=+abandon I asked this: Z (also known as Nilodop), owns stock that has a tax basis. He had dreams of retiring on its ultimate value. Dreams did not come true, and it's now worth about 30 cents per share, compared to its tax basis of about $9.00 per share. Z held it way too long. Now he can either sell it for 30 cents and have a per share cap loss of $8.70, limited to $3,000 per year, or abandon it, apparently after being told the tax consequences of both choices and with a need to ascertain both his intent and an affirmative act of abandonment. Z would want the abandonment treatment, I guess, because that makes itan ordinary loss as there is no sale or exchange.

As I recall the rules, a sale of stock at a loss yields a capital loss, with its attendant limitations on use to reduce taxes.

If the same stock is worthless (I think it means literally, not just almost), it's treated as a capital loss on the last day of the year in which it becomes worthless. (As an aside, the law says "shall be" but the reg. says "may be". I'd say shall wins.)

And if the same stock goes way down but does not become totally worthless, the ways to get a tax benefit seem to be to either sell it, receive some minor proceeds, and accept the limitations on using capital losses , or to take whatever outright steps are needed to abandon it in a legal and economic and permanent sense, thereby getting an ordinary loss, with all its usual advantages over a capital loss.

Depending on how close to worthlessness the stock becomes, the abandonment results can be very attractive in a tax sense. And it's very clear that a mere decline in value is not deductible. See 1.165-4. So is abandonment a bullet-proof technique to turn a likely capital loss into a sure ordinary loss?

One concern I have is some sort of argument by IRS akin to the one where a personal residence that has declined in value is turned into a rental. The decline in value up to the date of conversion is not deductible. But I don't see this applying to an abandonment of stock. It always was an investment, so there's no different use. It would be a big stretch, I believe, to disallow a real, substantive abandonment loss on the argument that one does not (cannot?) abandon an investment that has any value. Why not?

So if someone is in a research mood, please let me know whether this technique has been challenged by IRS, and what was the outcome.

And in case we het that far, would the wash sale rules become relevant if I, shortly after abandonment, decide it was a bad investment move, so I go out and buy the same stock on the open market.
 

#2
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In 2008, Treasury modified Regs. Sec. 1.165-5 so that it now states that the abandonment of a security will
result in that security being treated as worthless. Therefore, in the future, abandoning corporate securities will generate
a capital loss.
 

#3
keiser  
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IRS says:
"Question
I own stock that became worthless last year. Is this a bad debt? How do I report my loss?
Answer
If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt. Worthless securities also include securities that you abandon. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it.

Treat worthless securities as though they were capital assets sold or exchanged on the last day of the tax year.
You must determine the holding period to determine if the capital loss is short term (one year or less) or long term (more than one year).
Report worthless securities on Part I or Part II of Form 8949, and indicate as a worthless security deduction by writing Worthless in the applicable column of Form 8949."
https://www.irs.gov/faqs/capital-gains- ... tax%20year.
 

#4
Nilodop  
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TAXMASTER, that's a good find. I wonder whether some taxpayer had claimed an abandonment as ordinary loss, the way it used to be, and IRS settled rather than have an unfavorable (to IRS) decision on the record. In any event, poof, there goes my hope for a big fat ordinary deduction above the line.

As an aside, my CRD has been AWOL for a long time, maybe an unscheduled sabbatical or whatever. In any case, now I know the rule since 2008. If the CRD returns, I'll try to get them to check out all this stuff.

And of course, IRS made that change w/o any reference to the old rule - that, according to 1.165-5(c), a worthless stock has to be "wholly worthless" in order to be deducted. So the unstated "logic" is that a worthless stock deduction is only available if it's totally worthless, but an abandonment is deemed worthless even if it has some small value. Maybe I'm wrong, but I thought cases and rulings have held consistently that worthless means wholly worthless. Another CRD project.
 

#5
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I realize this would be taking advantage of a distinction without much of a difference, but since 165(g) deals with worthless securities and the stock in the OP has value, it looks to me that abandonment is a viable reporting position. Abandonment in this case is simple. Just assign the stock to the corporation with a cover letter saying the TP is abandoning his investment. I've used it successfully several times, but the returns were not audited.
(What does CRD mean?)
Steve
 

#6
Nilodop  
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On my wash sale question, I guess it would be one, because the language in 1091 is
In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock ...
. An abandonment is a disposition.
 

#7
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You sure about that? It seems to me that the basic idea of an abandonment is no disposition. Rather, it's giving up -- sort of like throwing a stock certificate in the trash. An affirmative act is merely evidence.
Steve
 

#8
Nilodop  
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No, I'm not sure about it, but I'm sure having trouble understanding ow one can abandon stock via an affirmative act and still have the stock.
 

#9
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That seems impossible.
Steve
 

#10
Nilodop  
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I said in #6 An abandonment is a disposition.
You said in #7 You sure about that? It seems to me that the basic idea of an abandonment is no disposition.
I said in #8 No, I'm not sure about it, but I'm sure having trouble understanding ow one can abandon stock via an affirmative act and still have the stock.
You said in #9 That seems impossible.

So please explain what you are talking about.
 

#11
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To me, abandonment effectively means disclaiming ownership, except it means after claiming ownership. And I am equating ownership with "having" the stock -- as in there is nothing to "have". So one cannot both abandon and "have" the stock.
Steve
 

#12
Nilodop  
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If you abandon it, you no longer have it, so you must have disposed of it.
 

#13
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OK
Steve
 

#14
Nilodop  
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I wonder whether some taxpayer had claimed an abandonment as ordinary loss, the way it used to be, and IRS settled rather than have an unfavorable (to IRS) decision on the record.. Well, probably. Here's what excerpts from the proposed reg. preamble (which was finalized in 2008 and linked above) say:

The Treasury Department and the IRS understand that some taxpayers have taken the position that a loss under section 165(a) resulting from the abandonment of a security is not subject to the loss characterization rules provided in section 165(g).
********
The proposed regulations provide that, for purposes of applying the loss characterization rules of section 165(g), the abandonment of a security establishes the worthlessness of the security to the taxpayer.


BTW, I did track down my CRD, and they were quick to point me to the proposed reg. preamble.

(What does CRD mean?). Fair question. I have access to my Crack Research Department, which is an invaluable resource to someone like me, who has been out of active practice for a bit.

but since 165(g) deals with worthless securities and the stock in the OP has value, it looks to me that abandonment is a viable reporting position. . As we have now learned, not since 2008 except to claim it as a worthless stock (capital) loss.
 


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