Asset with zero value

[Guest Sheryl L]

I have a pooled PSP that terminated in 2001. All cash was distributed to participants in 2001. There are 4000 shares of an LP that have a zero value. The broker for the LP stated the LP is still a viable corporation but zero value. Basically, owners of the LP ran off with the assets.

When preparing the 2001 5500, the value of assets at YE is zero. What should I do with the LP? Do I continue to file zero value 5500, which might generate letters from PWBA, distribute zero value LP to one person (ie. owner, which doesn't sound like a good idea)?

The company I work for is a Trust company and we hold the LP on our system. They have to be distributed off at some point.

I don't think it's a viable request to ask 15 participants to find someone to hold shares of an LP that are worthless.

Please help!

[mbozek]

Fact that LP has 0 value now does not mean that LP will always be worth 0. Assets may be recovered in future through collection/ court enforcement which would then accure to the shareholders of the LP. Sometimes the crooks are caught and agree to return assets to reduce their sentence. Also if the LP is a viable corporation then the LP must have some business operations that will create value in the future even if it has 0 value today. I dont know why you are holding the shares of the LP if the plan is terminated. Check the plan document to see what is to be done upon termination-- I think that all plan assets are to be distributed. Divide the shares among the participants in the same proportion that their account bears to all plan assets and issue them certificates of ownership along with a 1099R, if required.

[jpod]

If employer thinks it's worth $0, then it should find some way to sell it or have it redeemed by the LP for $1.

I say that with tongue in cheek.

In all likelihood it is not worth $0; it is worth something, but it is illiquid. This is always the risk one faces when retirement plan assets are invested in illiquid assets, and now the chickens are coming home to roost. The choices are: (1) the plan cannot be terminated; or (2) find a way to unload it in a transaction and at a price that do not raise prohibited transaction and other fiduciary breach issues.

[mbozek]

jpod: If the asset is not publicly traded or has been delisted from an exchange it will be very difficult to find a buyer. There is no requirement that an illiquid asset be sold in order to distribute the participants' interest on account of a plan termination. Terminating plans which have an interest in illiquid real estate can transfer the RE to a taxable trust and distribute certificates of interest in the trust to participants. The participants can rollover the certificates of ownership to an IRA. There is no reason why the trustee cannot divide up the 4000 shares of the LP among the plan participants and transfer the interest to each participant. If the FMV of the interest is 0 the participants do not have to rollover the interest to an IRA. The problem may be getting an accountant to certify the the FMV of the shares . It may be an admin hassle to transfer the ownership to the shares but from a legal standpoint it is doable.

[Guest b2kates]

I had an ESOP with a similar situation. On termination, we distributed the securities pro-rata to all of the participants.

There is also the issue of fiduciary claim. Maybe there is a securities action against the promoter of the LP. You do not state how much of the Plan was invested in the LP, that might expose the Trustees to a claim for the losses.

[jpod]

MBOZEK:

You are correct, but I think that approach is highly impractical, expensive, and an employee relations nightmare.

If it is a small plan (i.e., not subject to the audit requirement), maybe the illiquid portion of the plan can be spun off as a separate frozen plan and the liquid portion terminated. The plan sponsor will then have to file 5500s for the spun-off illiquid plan (not a big deal) and possibly amend the plan for future law changes, until something can be done with the LP interest.

I don't see how this approach can put the qualified status of the liquid plan at risk, and the need to file a pretty simple 5500 for the spun-off plan and possibly amend the plan for law changes seems less cumbersome and easier to explain to employees and probably less expensive than going through the certificate route.

[mbozek]

why does the plan sponsor need to incure any cost in maintaining this illiquid asset for an indefinite period? It could be years before any funds are recovered. Just distribute the shares to the participants. As record owners they will be notified of any further developments in the stock and if it has 0 value at distribtion there will not be any income taxation. Any other action is a waste of funds for the plan sponsor.