Academic journal article Journal of Accountancy

Worldcom Shareholder's Loss Not Theft

Academic journal article Journal of Accountancy

Worldcom Shareholder's Loss Not Theft

Article excerpt

Criminal conviction of corporate officers for misconduct is not enough to allow shareholders to claim a theft loss, the Tax Court ruled.

In cases where a shareholder's stock becomes worthless due to corporate theft, it would generally be advantageous to treat relatively small losses as capital losses (due to the 10% of AGI floor for theft losses) and larger losses as casualty/theft losses, because a casualty/theft loss is a deduction against ordinary income and recouped more quickly

A WorldCom Group employee, Mehdi Taghadoss, purchased stock and exercised options through an independent 401(k) and employee stock purchase plan. After WorldCom's top officials were charged with fraud, the firm filed for bankruptcy in July 2002. (Ex-CEO Bernard Ebbers was convicted of fraud and sentenced to 25 years in prison in July 2005.) A reorganization plan approved in October 2003 provided, inter alia, that Taghadoss' interests would be canceled when WorldCom emerged from bankruptcy. Taghadoss filed his 2003 tax return claiming a casualty or theft loss of $1,344,863, then received a statement valuing his 31,083 shares at $677. WorldCom emerged from bankruptcy in April 2004. The IRS disallowed the loss for 2003, and Taghadoss sued.

For a casualty loss, the Tax Court noted that Taghadoss did not suffer physical damage to his property, as required in Furer v. Commissioner (TC Memo 1993-165, aff'd without opinion, 74 AFTR2d 94-6019 (9th Cir. 1994)). In assessing a theft loss, the court relied on cases defining theft consistently with laws of the taxpayer's state of residence. …

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