Holders of Enron shares likely have tax loss at best

Perhaps a better future for Kmart than for Bethlehem shares

Dollars & Sense

February 24, 2002|By Neil Downing | Neil Downing,THE PROVIDENCE JOURNAL

What would you recommend someone to do who actually owns Enron stock, such as myself. My feeling is that I should just hang on to it, since it's worth nothing anyway, and it may just resurrect. It's a long shot, but one never knows.

Don't get your hopes up. Shareholders with stock in a company that's entered bankruptcy proceedings rarely recover anything, said Peter A. Chapman, president of Bankruptcy Creditors' Service Inc. of Trenton, N.J., and the editor of newsletters that track specific companies through bankruptcy proceedings.

Before you decide what to do with your shares, however, you should first have some understanding of what bankruptcy is all about.

In general, corporate bankruptcies fall into two categories:

Liquidation: The court appoints a trustee to sell a company's real estate, equipment, inventory, trade names and other assets to help pay off loans and other debts to lenders and other creditors, said Edward M. Mazze, dean of the University of Rhode Island's College of Business Administration, and a former banker and U.S. Bankruptcy Court trustee.

What happens to the shares? Shareholders are at the end of the line of creditors, and there's rarely anything left for them. "Shareholders are so far off the map that it would be virtually impossible" for them to receive anything, Mazze said in an interview at his office in Kingston, R.I.

Reorganization: The court keeps a company's creditors at bay while the company tries to reorganize its finances. Bankers can supply needed cash to keep the company running because the court, in effect, gives them first dibs on the company's assets in case things don't pan out. In other words, the company gets some breathing room, continues to operate (although usually in a scaled-down mode) and typically gets a chance to put forth its own plan to try to resolve its problems.

Even under reorganization, however, chances are slim that the company will emerge from bankruptcy proceedings intact as a continuing business, Mazze said. In most cases, "it will never survive ... as the kind of business it was before."

Factories, property, equipment, divisions and subsidiaries - even the entire company - may be sold to competitors or others. In general, reorganization "means the end, but it's a more gentle ending" than liquidation, he said.

There are always exceptions, Chapman said. Sometimes, shareholders wind up with stock (or other types of securities) in the surviving company. In most cases, however, shareholders get nothing. "How often do shareholders recover? Almost never," Chapman said.

What to do if you hold shares in a company that's in bankruptcy proceedings? The answer depends in part on your own circumstances, said Alan S. Wardyga, a certified financial planner licensee and former chairman of the Rhode Island chapter of the Financial Planning Association, a trade group for financial planners and others.

For example, if you're young, you bought the stock for the long term and the shares are a small part of your overall investment portfolio, you may want to simply hold the shares in case they rebound in value, or shareholders recover something from the bankruptcy, said Wardyga, who is also president of Wealth Management Resources Inc., an investment advisory firm based in Lincoln, R.I.

If you're retired, you may want to hold your shares for a fixed term - six months or a year, for instance - and evaluate the company's prospects then. If the outlook remains bleak, you may want to sell some or all of your shares at that point and claim a loss for tax purposes, he said.

Remember, however, that just because a company enters bankruptcy doesn't mean you automatically get a tax break. In general, the company must be liquidated, with no hope of recovery for shareholders, for you to treat the stock as officially worthless.

Otherwise, you'll need to have a "basis" on which to calculate a loss for tax purposes. You may do this by selling some or all of your shares, even for a small amount of money.

I asked Chapman for his opinion on what - if anything - shareholders might get out of the big-name bankruptcies of late. On Kmart: "There's a remote possibility something will be left for shareholders," he said. What about Enron, Polaroid and Bethlehem Steel? Shares in these companies will probably prove to be worthless eventually, he said. Global Crossing? "Too early to tell," he said.

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