What could happen to my common equity shares?
I own common equity shares in an master limited partnership. I have the funds in a Roth IRA. If the shares become worthless, what happens? How do I claim the loss? Is there a CODI risk and what does that mean?
Really good question. This is an area where MLP investing gets strange. Even though you own the MLP in your Roth IRA and you never took a distribution, you can still be subject to tax if the MLP generates UBTI (Unrelated Business Taxable Income) of more than $1,000 and CODI (Cancelation of Debt Income) is considered 100% UBTI. (See page 7 of this LINN Energy exchange offer).
Also, since the MLP is in your Roth, there is no way to take advantage of the capital loss.
It is definitely worth talking with your tax / financial advisor to determine whether you sell your shares before a bankruptcy, hold, or participate in any proposed share swaps.