The Internal Revenue Code generally provides for the deductibility of economic losses incurred by taxpayers in for‐profit transactions. § 165(g) specifically allows the deduction of losses associated with securities that become worthless. Unfortunately, neither Congress nor Treasury have articulated specific conditions necessary to demonstrate that a security satisfies the requisite “worthless” condition. This uncertainty has led to the courts having been placed in the role of arbiter in the many cases where taxpayers and the Internal Revenue Service differ in perceptions regarding whether a particular stock is worthless.
This article examines statutory provisions, factors the courts have considered in deciding the worthless stock question, an analysis of case law, and proposes conditions that Treasury could consider in establishing safe harbor rules. Such rules could provide both taxpayers and the Internal Revenue Service with a means to reduce the continuing litigation of this question.
