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.