Timing of worthless security deductions.

• Author: Lev, Jacquelyn Fitzgerald

The cost or other basis of a security that becomes worthless will be treated as a capital loss on the last day of the tax year in which it becomes worthless (Sec. 165(g)), subject to capital loss limitations.

"Security" is defined as a (1) share of stock in a corporation, (2) right to subscribe or receive a share of stock in a corporation and (3) bond, debenture, note or certificate, or other evidence of indebtedness with interest coupons or in registered form, issued by a corporation or government (Sec. 165(g)(2)). Excluded from this definition are securities in an affiliated domestic corporation, defined as a corporation owned at least 80% directly or indirectly by the taxpayer, with more than 90% of its gross receipts derived from sources other than royalties, rents (except rents received in the ordinary course of business), dividends, interest (except interest received on the deferred purchase price of operating assets sold), annuities and gains from sales or exchanges of stocks and securities (Sec. 195(g)(3)).

Losses must be claimed in the first year an identifiable event occurs proving the security is worthless, unless there is a reasonable possibility of the security regaining worth, no losses are allowed for partial worthlessness. The burden of proving worthlessness rests with the taxpayer. Some events that may prove worthlessness include: * Liabilities in excess of fair market value. * Revocation of charter. * Cessation of business. * Bankruptcy. * Levy of all physical assets. * Surrender of stock in complete liquidation. * Cancellation of stock. * Determination by stockholders of a dissolution date.

Reference materials are available to provide listings of stocks...