What does Chapter 11 Bankruptcy mean to an investor holding shares of a Chapter 11 Company?

I held shares in BIND Therapeutics, a small biotechnology company on the NASDAQ that was liquidated on the chapter 11 auction block in 2016. There were sufficient proceeds to pay the debts and return some cash to shareholders, with payments in 2016 and 2017. (Some payments have yet to occur.)

The whole process is counter-intuitive and full of landmines, both for tax preparation & planning and receiving payments:

Landmine 0: Some shareholders will sell in a panic as soon as the chapter 11 is announced. This would have been a huge mistake in the case of BIND, because the eventual liquidation payments were worth 3 or so times as much as the share price after chapter 11. The amount of the liquidation payments wasn't immediately calculable, because the company's intellectual property had to be auctioned.

Landmine 1: The large brokerages (Vanguard, Fidelity, TDA, and others) mischaracterized the distributions to shareholders on form 1099, distributed to both shareholders and the IRS. The bankruptcy trustee considered this to be their responsibility.

According to the tax code and to the IRS website, the liquidation is taxed like a sale of stock, rather than a dividend.

"On the shareholder level, a complete liquidation can be thought of as a sale of all outstanding corporate stock held by the shareholders in exchange for all of the assets in that corporation. Like any sale of stock, the shareholder receives capital gain treatment on the difference between the amount received by the shareholder in the distribution and the cost or other basis of the stock."

Mischaracterizing the distributions as dividends makes them wrongly ineligible to be wiped out by the enormous capital loss on the stock. Vanguard's error appeared on my own 1099, and the others were mentioned in an investor discussion on stocktwits. However, Geoffrey L Berman, the bankruptcy trustee stated on twitter that while the payments are NOT dividends, the 1099s were the brokers' responsibility.

Landmine 2: Many shareholders will wrongly attempt to claim the capital loss for tax year 2016, or they may have failed to understand the law in time for proper tax planning for tax year 2016.

It does not matter that the company's BINDQ shares were cancelled in 2016. According to the IRS website

"When a shareholder receives a series of distributions in liquidation, gain is recognized once all of the shareholder's stock basis is recovered. A loss, however, will not be recognized until the final distribution is received."

In particular, shareholders who receive the 2017 payment will not be able to take a capital loss for tax year 2016 because the liquidation wasn't complete. Late discovery of this timing issue no doubt resulted in an end-of-year underestimation of 2016 overall capital gains for many, causing a failure to preemptively realize available capital losses elsewhere.

I'm not going to carefully consider the following issues, which may or may not have some effect on the timing of the capital loss:

1. Whether simply refusing the 2017 distribution is sufficient to allow the shareholder to take the loss in 2016. I suspect the answer might require a careful reading of the actual tax code/treasury regulations/court cases, not just the IRS website. (Whether this is desirable depends on the amount of the payment and also on the shareholder's tax situation.)
2. Whether the future final distribution was already known in 2016, and if so whether the old case Commissioner v. Winthrop still provides any precedent for an early capital loss.
3. Whether some shareholders may have abandoned the right to the 2017 payment by actions already taken in 2016. (Whether this is desirable depends on the amount of the payment and also on the shareholder's tax situation.)

Landmine 3: Surprisingly, it appears that some shareholders who sold their shares in 2016 still may not claim the capital loss for tax year 2016, because they will receive a liquidation distribution in 2017.

Taken at face value, the IRS website's statement "A loss, however, will not be recognized until the final distribution is received" appears to apply to shareholders of record of August 30, 2016, who receive the payouts, even if they sold the shares after the record date. However, to know for sure it might be worth carefully parsing the relevant tax code and treasury regs.

Landmine 4: Some shareholders are completely cut out of the bankruptcy distribution.

The bankruptcy plan only provides distributions for shareholders of record Aug 30, 2016. Those who bought shares of BINDQ afterwards are out of luck.

Landmine 5: According to the discussion on stocktwits, many shareholders have yet to receive or even learn of the existence of a form [more secure link showing brokers served here] required to accept 2017 payments. To add to confusion there is apparently ongoing legal wrangling over whether the trustee is able to require this form. Worse, shareholders report difficulty getting brokers' required cooperation in submitting this form.

Landmine 6: Hopefully there are no more landmines.
Boom.

DISCLAIMER: I am not a tax professional. Consult the tax code/treasury regulations/IRS publications when preparing your taxes. They are more trustworthy than accountants, or at least more trustworthy than good ones.