BAD NEWS ABOUT YOUR XYBERLO$$E$ LOON
Jan. 23, 2008, 9:40PM
Assets & Answers
IRS says Enron stock can't be deducted as theft losses
BY SHANNON BUGGS
Q: We still own Enron stock and qualify for the reimbursement package that was mailed to investors this week. My question: Can we deduct the losses not covered by the reimbursement as theft losses on our taxes next year? At what point does a capital loss become a theft loss?
A: No, you cannot deduct as theft losses the amount you invested in Enron stock that is not covered by the reimbursement.
The Internal Revenue Service stated in an April 19, 2004, notice that it would "disallow such deductions and may impose penalties" on taxpayers who claimed theft loss deductions for "the decline in market value of their stock caused by disclosure of accounting fraud or other illegal misconduct of the officers or directors of the corporation that issued the stock."
The tax code limits losses for individuals to:
• Losses incurred in a trade or business.
• Losses incurred in any transaction entered into for profit outside of a trade or business, which are called capital losses.
• Losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from theft or casualties, such as fire, storm and shipwreck, which are called theft or casualty losses.
In its notice, the IRS cites several judicial rulings that have found that capital losses do not become theft losses, even when a stock becomes worthless because of "corporate officers misrepresenting the financial condition of the corporation, even when the officers were indicted for securities fraud or other criminal violations."
You can challenge that determination by filing a lawsuit and proving in court that the "loss resulted from a taking of property that is illegal under the law of the state where it occurred and that the taking was done with criminal intent."
Otherwise, claim a capital loss.
Capital losses are deducted first from capital gains, and then again up to $3,000 of other income. Any amounts of the loss remaining can be carried over into future tax years. A carry-over loss may be deducted from capital gains in later years plus up to $3,000 of ordinary income.
• IRS Notice: www.irs.gov/irb/2004-16_IRB/ar09.html
Q: My boyfriend says the end of the grace period is the true due date for our rent and it's not a problem to pay it on the last day. I think he's got it wrong. The first is the real due date and the grace period is just extra cushion in case we need it. Who's right?
A: You are.
The grace period is a time provided during which default, cancellation or eviction will not occur even though payment is past due.
It's a common feature in many loan contracts and insurance policies, but it should not be abused. The due date is the deadline to make payment, not the last day of grace period.
Dividend discourse
Several readers commented on Monday's column about how dividend cuts could damage investment portfolio performance and prevention strategies.
Reader Gordon Holloway suggested buying exchange-traded funds that track the performance of dividend indices. He's partial to SDY, the ticker symbol for an ETF with results before expenses that generally correspond to the price and performance of the Standard & Poor's High-Yield Dividend Aristocrats index.
The S&P Aristocrats are companies that have had at least 25 consecutive years of annual dividend increases. The SDY tracks the 50 highest dividend-yielding Aristocrat stocks in the S&P Composite 1500 and is considered the blue-chip version of this type of ETF.
Other exchange-traded funds also track dividend benchmarks, including the iShares Dow Jones Select Dividend Index Fund (DVY). This tries for investment results before expenses that correspond to the Dow Jones select dividend index, which is composed of the 50 highest dividend-yielding securities excluding real estate investment trusts in the
Dow Jones total market
index.
For international exposure, there are PID, PowerShares International Dividend Achievers Portfolio and DAT — the Mergent International Dividend Achievers Index, which mimic each other.
For those who want to do their own stock picking, reader Jim DuLaney offered this research option:
Possibly the best dividend information source is Mergent's Dividend Achievers, published quarterly. It lists approximately 300 of the most consistent dividend paying stocks. To qualify, a company must have increased its regular cash dividends annually for 10 or more consecutive years. One example: Procter & Gamble has increased its dividend for 100 years.
Mergent's newsletter subscription for four issues costs $199 and its latest paperback edition of the Dividend Achievers Handbook is $50. Go to www.dividendachievers.com for more information.
Columnist Shannon Buggs has completed the personal finance planning certificate program at the University of Houston. Contact her at shannon.buggs@chron.com.
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