February 3, 2012
One of my favorite lines from the Lord of the Rings trilogy is when the wizard, Gandalf, speaking to Frodo about feelings of regret at having to witness difficult times, says, "So do all [people] that come to see such times, but that is not for them to decide. All we have to decide is what to do with the time that is given to us." So it is with the shareholders of Eastman Kodak's (EKDKQ) common stock. Ten years ago it was worth over $30/share. Today it is worth a bit more than $0.40/share.
We've been getting questions about what happens to common stock in bankruptcy. The answer is that it's possible there might be some value left to the stock in bankruptcy, but it's pretty unlikely. Common Shareholders come last in bankruptcy (right after Preferred Shareholders) and have a residual claim on assets of the company assuming there are any left - and that's a very large assumption. So, the question Common Shareholders should be asking themselves is not will I get any value out of this stock through the bankruptcy, but rather what should I do with it now?
The punch line is to suggest it for bathroom wallpaper. But beyond the minimal price you might fetch in the market today or any residual claim you might get at the end of bankruptcy, there could be some value in tax savings from the loss of your investment's value. For those who own Kodak stock outside of an IRA or other tax-advantaged accounts, selling the stock at such a steep loss can shield you from having to pay taxes on some gains derived from elsewhere in your portfolio. If there are no other gains to offset, or you have exhausted your ability to offset gains and still have losses leftover, you can offset up to $3,000 per year in ordinary income.
You may elect to take advantage of these losses by selling Kodak stock at any time up until the shares stop trading. It is important to know that you must begin to book the loss on your taxes within the calendar year that you either sell or when the stock goes to $0.00 and stops trading. If you do not promptly report the loss on your taxes you will not be able to record the tax loss in following years. We don't believe Kodak's stock will stop trading and become worthless until 2013. If that happens in 2013 and you still hold it, then that is the year in which you must book the loss or risk forgoing the potential tax savings forever.
Regrettably, this is probably the most value you will realize from the shares have owned for years.
For more information about the tax advantage, look for our blog .
Brennan R. Redmond, CFA