How to deduct cost of restricted stock sold for future payouts

[susanbehn9617]

My company (A) merged with company (B) on 9/1.  The day before the merger, company A paid out all retained earnings to the stockholders who all have vested restricted stock.  I payed taxes on the awarded stock (83b election) in 2013.  We were paid zero for the stock transferred to company B.  Company B will pay a share of profits to company A original stockholders over 3 years.

The payout of retained earnings was substantial and reported as qualified dividends.  Is there any way I can deduct my original cost?  What happens if the future earnings don't pan out or I resign and forfeit them.  How can I still deduct my cost?

[DianeW777]

It depends on all the facts and circumstances as to how you will utilize your cost basis in Company A stock. It's unclear as to whether Company B awarded any stock to the stockholders of Company A.

Qualified Dividends:

The qualified dividends cannot be offset by your cost basis in the vested stock because they are dividends and not a sale for tax purposes.

Stock- Company A.

1. If you stock becomes worthless and there is no plan to pay you for the stock by Company B, then you might have a sale of worthless stock where the selling price is zero and the cost basis is your purchase price creating a loss. 
2. If you should be awarded stock in Company B, then the cost basis in the new stock is carried over from the old stock.

The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting.

1. Complete the IRS 83(b) form that has been provided to
2. Mail the completed form to the IRS within 30 days of your Award Date (mail to the IRS Service Center where you file your taxes.
3. Mail a copy of the completed form to your employer.

You would have had to attach a copy of the completed and filed form to your income tax return when you file your income taxes for the year in which the election is made.  

[susanbehn9617]

thanks.  We did not receive stock in company B.  I need more info on how to write off worthless stock

[DianeW777]

You can report it in the year they are deemed to be completely worthless. This usually happens when a company stops doing business or files bankruptcy.  You should be prepared with your proof and retain it in your tax file.

The sales price would be zero and the cost basis would be what you actually paid for the stock and December 31st as the date of sale. 

To enter worthless stock as investment sales:

1. Open (continue) your return in TurboTax.
2. In the search box, search for investment sales then click the "Jump to" link in the search results.
3. Answer Yes to the question Did you sell any investments?
   • If you land on the Here's the investment sales we have so far screen, click Add More Sales.
4. Answer No to the 1099-B question.
5. On the next screen, select the type of sale you had (stock, second home, collectible, land etc.) and click Continue.
6. Continue following the onscreen instructions to enter the sale.

Helpful Information:

• How do I deduct worthless stock?
• IRS FAQ -Worthless Security.