Newflow, this is very interesting because it states that upon reorganization we were simultaneously given 1.0 unit of a beneficial interest to the Litigation Trust. It also refers to WMI Inc. as a Grantor Trust.
After the Chapter 11 filing on September 29, 2008, your Washington Mutual Inc shares changed from ticker WM to WAMUQ to indicate bankruptcy status. On March 19, 2012, WAMUQ emerged from bankruptcy. The fomer common shares were cancelled and instead former common shareholders who opted in to the bankruptcy proceedings received the following for each share of Washington Mutual Inc:
An initial distribution made on March 23, 2012 of:
0.03349842 shares WMI Holdings Corp, ticker symbol WMIH
and
1.0 units of beneficial interest in the liquidating trust for Washington Mutual Inc (a grantor trust)
A second distribution made on August 1, 2012 of:
0.00076346 share WMI Holdings Corp, ticker WMIH
A possible distribution on March 27, 2012 of a rounding up additional share of WMI Holdings Corp, if applicable.
WaMu
Note that you only received the distributions listed above if you affirmatively consented to the bankruptcy reorganization. If you did not opt in, you will receive nothing at all.
Because the units of beneficial interest are non-transferable, no market exists to determine their fair market value in an established trading market. The holder of a beneficial interest must report his/her share of the income and expenses of the liquidating trust until it is terminated, which is not expected for three years. After the remaining assets are sold and the secured interests and higher priority claims are paid off, the common shareholders will receive a pro-rata share of whatever is left.
The WMI Holdings Corp is holding the residual assets of the Washington Mutual Inc holding company which did not go down the tubes with the bank. There are some net operating loss carryforwards and a reinsurance subsidiary which apparently still had value.
How do you account for these changes? In the absence of an official tax opinion, we advise the following:
1. Not a Worthless Security. This reorganization does not meet the Internal Revenue Code definition of a worthless security, so you cannot write off any partial loss of value before you sell it.
2. General Allocation Rule. The general rule is to allocate your cost basis for Washington Mutual Inc-WAMUQ to the two new securities that you received in proportion to their relative market values on the first day of separate trading (or in proportion to their relative market values based on actual cash collected.)
3. Non-Transferable Means No Market Value. Because there is no market value available for the non-transferable beneficial interests in the liquidating trust, you will not know their value until the trust is dissolved in three years and you know what actual distributions you received from it. Therefore, you cannot allocate your basis between the two new securities until the dissolution of the trust in three years.
4. No Estimates. The trustee has not published any estimates or projections as to what the common shareholder beneficial interests may expect to receive, if anything. IF the trustee publishes an estimate before the dissolution of the trust that the common shareholder beneficial interests are unlikely to receive anything, you can take that as an indication that the fair market value was zero. Then all of your basis could be allocated to the WMI Holdings Corp shares.
5. In Case of Sale. If you sell your WMI Holdings Corp shares before the trust is dissolved in three years and before the value of the units of beneficial interest is known, we would advise treating the sales proceeds as return of capital. Do this by allocating as much of your WAMUQ basis as needed to the WMI Holdings Corp shares in order to recognize no gain or loss. This defers recognition of the capital loss until the trustee gives an indication whether the units of beneficial interest will be worth anything at all. Cash distributions that are subsequently made by the liquidating trust would also be taken as return of capital until the time that the trustee states that no more payments will be made and/or dissolves the trust.
6. In Case of No Sale. If you do not sell your WMI Holdings Corp shares until after the trust is dissolved in three years, you can allocate your WAMUQ cost basis in the normal manner. Take (1) the fair market value of 0.03426188 share of WMIH on the future date that the final value of the liquidating trust interest is known, plus (2) the actual cumulative total cash distributions per unit of beneficial interest, to arrive at (3) the total value received per WAMUQ share. Allocate your WAMUQ cost to each of 0.03426188 WMIH and one liquidating trust unit according to their respective percentage of the total value received per share.
7. Cash in Lieu Payment. If you received any cash in lieu payment in 2012 from the sale of a fractional share of WMI Holdings Corp WMIH, we recommend treating this payment as return of capital by allocating as much of your WAMUQ cost basis as needed to the WMIH fractional share to offset exactly the cash in lieu payment. This will end up with recognition of no capital gain or loss. This avoids the situation of paying capital gains tax when you know you have a big loss. At the same time, you are not prematurely claiming a capital loss before the final cost allocations are known. Remember to deduct the cost you assigned to the fractional share during your basis calculations above.
8. Trigger for Capital Loss. After you have sold your WMIH, the trigger event to recognize a capital loss for your remaining basis will be either (1) the trustee report of no value left for common shareholders in the liquidating trust, or (2) the dissolution of the trust with a final payment. If you do not sell your WMIH (and the liquidating trust units have no value), there is no capital loss to recognize--all your WAMUQ cost gets carried over to your basis in WMIH.
8. Be Consistent. Always be consistent in your tax treatment. If you sell your WMIH shares and claim all the WAMUQ basis at the time of sale (not that we recommend doing so), do not allocate any of it to cash distributions from the units of beneficial interest later on.
9. Cost Basis Corrections. Some brokerage firms have been assigning all of the WAMUQ cost basis to the liquidating trust units and showing zero basis for WMIH, because the allocation is not known yet. If you sell your WMIH shares before the value of the liquidating trust units are known, the Form 1099 would show zero cost basis for WMIH. In this case, simply report the correction on your Form 8949 and show a corrected cost basis equal to the sales proceeds.
10. Lesson To Take Away. Unless you think there will be a lot of value left at the end, sell while the stock is still trading so that you can claim the loss right away and not be tied up in bankruptcy reorganization and liquidating trusts for six years.
