Question (Number 107 of Lehman FAQ):
"Does the distribution received by a holder of a U.S. Class 3 Senior Note affect the principal of the bond? Does the indicated value of the escrow CUSIP take on the original cost basis of the bond?"
Answer (important part underlined):
"The distribution to the U.S. Class 3 Senior Notes held through DTC was completed through an exchange of the bonds for an escrow position at DTC. The escrow positions were established on a one-to-one basis – so if a person held 1,000 in principal amount of an old Class 3 Senior Note, they would have 1,000 in the corresponding escrow position. The escrow positions in the Class 3 Senior Notes are transferrable. In accordance with Section 8.12 of the Plan, any distribution shall be allocated first to the principal portion, and so the initial distribution represents principal only."
Therefore, based on this guidance, all cash distributions received should be recorded as return of principal until the Plan trustee notifies the bondholders that no more payments will be made. The recognition of capital loss for the remaining adjusted basis will not be triggered until the security becomes completely worthless (in about five years!) Deductions for partial worthlessness will generally not be allowed under the Internal Revenue Code.
Bondholders who wish to recognize an immediate capital loss could do so by selling their escrow position in the Plan Trust, since the bond escrow position is transferable (unlike the stock beneficial interest which is non-transferable.) That is the only way to recognize capital loss now--by giving up any and all claims or interest in any future distributions. The adjusted basis of your LBHI bond carries over to the escrow position (after applying the return of principal distributions that you received.)
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