How $2,000 Became $20 And What To Do With It

In my foolhardy days, I bought WorldCom stock when it dropped from $60 a share to $4 a share. I thought it was a “buying opportunity.” When it dropped more from $4, I thought I had only a “paper loss.” You know the rest of the story. WorldCom went bankrupt. I lost $2,000.

Later, some plaintiff attorneys filed class action lawsuits on behalf of all the deceived investors like myself. I filled out the claim forms they sent to me and waited. Finally last week I received a check, for $20.46. The letter that came with the check says it’s the second distribution from the settlements but I don’t remember receiving a check from them before or what I did with it if I did receive one. $20 is better than nothing and I thank the attorneys. Their hard work recovered more than $6 billion for the investors. For some strange reasons, the attorneys are not seeking attorney’s fees from the recoveries. I’m not sure who’s paying them.

With my $20 check comes the puzzle on what to do with it and how to report it on my tax return. The letter says:

The WorldCom, Inc. Settlement Funds are “Qualified Settlement Funds”, as defined in Treas. Reg. Section 1.468B-1 through 5. IRS regulations provide in part that “whether a distribution from a Qualified Settlement Fund is included in the claimant’s gross income is generally determined by reference to the claim in respect of which the distribution is made and as if the distribution were made directly by the transferor.”

Do you understand it? I don’t. And I’m not going to consult a tax advisor about a $20 check, thank you very much. My best interpretation is because the money lost was in my IRA, I’m supposed to treat this $20 as if it came as a distribution from the IRA. Because I’m under 59-1/2, distribution from an IRA is taxable and it carries a 10% early withdrawal penalty. But wait, I have 60 days from the date of receiving the distribution to roll it over to an IRA and avoid the tax and the penalty. Therefore I’m going to send it to the IRA with a rollover form.

Invest; don’t speculate. A “buying opportunity” isn’t as obvious as it looks. A “paper loss” is a real loss too. These are expensive lessons for which I paid good money. Live and learn.

See All Your Accounts In One Place

Track your net worth, asset allocation, and portfolio performance with free financial tools from Personal Capital.

FREE E-mail Newsletter

Join over 3,000 readers and get new articles by e-mail:

No spam. Unsubscribe any time.

Comments

  1. Jonathan says

    I did a similar thing as bought Enron at about 68 cents per share. “How can it go down to zero?” Guess who was looking for the “worthless securities” form later…

    Amazing that the lawyers would give up their 1/3 of the pie.

  2. Anonymous says

    There was a TV program called “American Greed” on CNBC? last week about the World Com accounting scandal. CEO Bernie Ebbers got 25 years (basically a life sentence at his age). Some said it was harsh, but I think it was more than fair based on all the people he effectively robbed. I do wonder how much responsibility he actually had for the scandal verses others like CFO Scott Sullivan. Certainly he and others got off easier for helping to take down Ebbers.

    Ted

Leave a Reply

Your email address will not be published. Required fields are marked *