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Adjusting Cost Basis for Bankruptcy

You buy a bond B0 during a bankruptcy. Subsequently, the company emerges from bankruptcy and the following takes place:

1) B0 is declared worthless

2) A new bond B1 is created and given to old bondholders, with new terms and conditions

3) Some ordinary shares S1 are created and given to old bondholders

How do you do the tax accounting for this? The scenarios that I see:

A) You can declare a tax loss on B0, then hold B1 and S1 with a cost basis of $0

B) You can take no loss on B0, and simply adjust the cost basis of B1 and S1. But if you adjust the cost basis then it's open to some interpretation about how to divide the value of B0 across the two new securities.

What is the correct procedure for this case?

Reply to
W
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Yes: their cost basis totals your cost basis for B0.

Allocate it proportional to their market values at the end of the first day of trading.

Seth

Reply to
Seth

It's incorrect to state "B0 is declared worthless." That statement means you got nothing for it. You got the new bond and some shared of reorganized company. The company should issue a statement of how to split the value. Your cost basis in B0 becomes your basis in the new bond/stock but the company itself would issue the ratio. Same as when a company spins off a unit or breaks into two or more smaller companies. Joe

Reply to
JoeTaxpayer

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