The Architecture Firm's Investment in the Oil Company
The case depicts Richard's architecture business as an inventor in the Oil Company. Dividends from its interests in shares of the Oil Company have provided the architecture firm with a steady stream of returns.
Impact of the Oil Company's Collapse
The collapse of the Oil Company means that the architecture firm's shares would be forfeited. Similarly, payments to creditors can not be made exclusively from remaining profits and, more frequently than not, certain numbers remain on paper but not in hard cash because the corporation in bankruptcy must have reinvested them. The moment a company goes bankrupt, its stocks cease from the securities exchange. It implies that the assets of the oil company will be liquidated and the money used to pay off the creditors.
Treatment of Creditors in Bankruptcy
As a shareholder, the bankruptcy code is clear on the dissolution and payment of creditors in bankruptcy. In that regard, the architectural firm will only share whatever is remaining after all secured, and unsecured creditors have been paid. However, because the architectural firm is not the one undergoing the bankruptcy process, it cannot treat payments to creditors in the Oil Company as deductible expenses.
Tax Considerations for Investment Losses
Seemingly, the architectural firm will incur investment losses, and the best way to attain a tax shield in the form of deductible expenses is to consider its losses in investment in the Oil Company because the intention was to make profits. However, Richard's company cannot treat the payments to the creditors as tax deductibles. Moreover, the company has another option of computing the stocks it shall have lost due to bankruptcy and use the stock loss as a tax deductible while filing its tax returns.
