IRS will require proof that stock really is 'dead'

By Mark Schwanhausser
Knight Ridder News Service

As the old saying goes, there's nothing certain but death and taxes. But when it comes to taxes on worthless stocks, how do you define "death?"

You might give up on an investment when a company is delisted by the stock exchange, files for bankruptcy or begins selling off its assets. But where you see a corpse with rigor mortis, the Internal Revenue Service might see a patient in intensive care who still has a pulse.

Take Enron, WorldCom or Peregrine Systems. Despite their infamous failures, someone is still willing to pay pennies for those stocks.

"A lot of people think that because a company filed for bankruptcy that it's worthless. That's not always the case," said Ron Petersen, an enrolled agent and financial adviser in Campbell, Calif.

In case of an audit, you must gather proof that the company was dead as of Dec. 31, 2002. Then, of course, you need to prove your investment was worthless.

The easiest solution is to just find someone to take it off your hands. It's an invalid sale if you deal it to your brother or sister, but your broker might oblige you.

E-Trade buys securities held in customer accounts and charges commissions no higher than the sales proceeds. So E-Trade would charge you $2 to palm off 100 shares of a stock selling for 2 cents each. If there truly is no market for the stock, E-Trade will pay you $1 to effect the sale, at no charge.

Many brokers will dash off a letter saying there's no market for the stock, or you can save newspaper clippings, trading data and other proof that the investment is worthless. If it's a private investment, get a letter from an executive stating that the company has dissolved, or at least save letters showing that you had dug into its demise.