In the late 1990s, Sam invested $100,000 in TechCo, a startup high-technology venture. Although he had great expectations of financial reward, TechCo's efforts were not well received in the market, and the value of Sam's stock investment plummeted. Four years ago, TechCo declared bankruptcy, and Sam wrote off his $100,000 in worthless securities as a long-term capital loss.
To Sam's surprise, this year, he receives $40,000 from the bankruptcy trustee in final settlement of TechCo's affairs. Sam now realizes he probably should not have claimed the loss four years ago because the deduction is allowed only if the stock is completely worthless. The $40,000 recovery indicates that the stock was not completely worthless. Because the three-year statute of limitations has passed, he does not plan to amend his tax return from four years ago. He also decides that the $40,000 is not income in the current year because he is merely recouping some of his original investment.
What is your response to Sam's actions? Do you think this was the intention of the tax laws governing an investor's losses? If consulted by Sam, what advice would you give?