How/when to take loss in private company that re-orgs post-Chapter 11 and converts to new/fewer shares?

Question

My wife's company is private. We bought 60 shares x $1k/share 5+ years ago.

This past year

• they (OldCo) went Chapter 11 bankrupt

• re-emerged from bankruptcy

• as a new LLC (NewLlc)

"There were assets left over after all claims were made against OldCo. So they distributed those assets to the former shareholders and that distribution came in the form of shares of the new equity" of NewLlc: 7 shares x $1k/share. I have a form 8937 from them, but not a "deemed worthless" letter/form.

So, how/when do we take the loss? It seems like there are 3+ options:

1. Take whole $60k loss now (mostly carryforward, etc.). If NewLlc shares become liquid in the future and we sell them, pay tax on basis=$0/sh.

2. Take $53k loss now. For future future sales, NewLlc have basis of $1k/sh.

3. Take 0 loss now. When sell future shares, treat as basis of $8571/sh ($60k / 7sh).

One H&R Block person I dealt with online says #3 is the only kosher approach.

But I'm seeking a 2nd opinion...

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Update: some excerpts from form It's 8 pages long....

Some chunks

On the Effective Date, the holders of the Existing Parent Equity Interests were entitled to receive each holder's pro rata share of, as applicable:

(i) With respect to Eligible Shareholders, the Shareholder Subscription Rights, which entitle a holder to participate as a beneficiary of OldCo's Parent's exercise of its rights as a Backstop Party to the New Money Investment;

(ii) With respect to Ineligible Shareholders, cash in the amount equal to the value of the Shareholder Subscription Rights that would have been distributable to such Shareholder if such Shareholder was an Eligible Shareholder; and

(iii) The cash proceeds or other consideration, if any, available from Reorganized OldCo's Parent's assets after all Allowed Claims against OldCo's Parent are satisfied in full with the proceeds from the Reorganized OldCo's Parent assets.

Eligible Shareholders exercising their Shareholder Subscription Rights shall be a beneficiary of OldCo's Parent's exercise of its rights as a Backstop Party under the New Money Backstop Commitment Agreement with respect to Reorganized OldCo's Parent's New Investment Allocation (i.e., with respect to OldCo's Parent's right to participate in the New Money Investment as a Backstop Party).

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Form 8937, Part II, Line 15 Effect on Basis to U.S. Holders As a result of the Transaction, each holder of a First Lien Debt Secured Claim, First Lien Deficiency Claim, Second Lien Notes Claim, Unsecured Notes Claim, General Unsecured Claim, General Unsecured Elective Claim, and Existing Parent Equity Interest (together or separately, a "Claim") exchanged its Claim for the right to receive consideration discussed on Line 14 of this Form 8937.

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Ah, this bit at the end seems like it confirms option3: Form 8937, Part II, Line 18 Claim Holders The Transaction generally should not result in a recognizable loss to U.S. Holders of a Claim to the extent such Claim constitutes a security for U.S. federal income tax purposes, the consideration received by the U.S. Holder in the Transaction constitutes a security for U.S. federal income tax purposes, and the exchange qualifies as a tax-free reorganization pursuant to Section 368(a).

Answer 1

Per the information on the form, you swapped one security for another as part of a "reorganization" and so do not have either a realized gain or a realized loss from the swap. Your basis in the 7 new shares is equal to your basis in the 60 original shares when you sell them. That means option 3 is the only kosher approach.