When is a stock worthless for tax purposes
When an S corporation’s stock becomes worthless, shareholders are treated as having disposed of their entire interest in the S corporation for passive activity loss purposes, allowing the shareholders to deduct suspended passive losses from the S corporation without regard to the passive activity loss rules. In Year 6, Sub was deemed to liquidate because taxpayer filed a check-the-box election to treat Sub as a disregarded entity rather than as a corporation for tax purposes. Taxpayer claimed a worthless stock deduction for Year 6. In the taxpayer’s view, the stock of Sub became worthless in Year 3 and remained worthless through Year 6. For example, a client may think a bankruptcy filing by a company makes the stock worthless. For tax purposes, current insolvency or the bankruptcy filing — especially if it is Chapter 11 (a