One of the many spectacular failures of 2009 was General Motors. Unbelievably, GM went from one of the most important companies and stocks in the nation to a penny stock. GM got a bailout, but its shareholders didn't.

With tax time at hand, you may be wondering if you can write off your GM losses on your 2009 income tax return.

If your GM stock is worthless, can you take a loss for a worthless security? In short, the answer is no. You have to sell it in order to recognize a loss. Sell it, you say? But it's worthless. Isn't it?

The old GM stock stopped trading on the New York Stock Exchange on June 1, 2009, the day that GM filed for bankruptcy. Each share of GM stock became a share in Motors Liquidation. While it was widely reported that the shares were worthless, those shares still traded, then and now, over the counter. It was as though people just couldn't believe GM shares could actually be worthless. Thousands of investors, especially around Detroit, hung on to their stock.

Early on in the GM bankruptcy, regulators explained that GM stock could be canceled. The new GM, which emerged after the old GM went through bankruptcy, has no publicly traded stock right now. Investors who own Motors Liquidation shares did not and will not get new stock in the restructured GM when the company makes its initial public offering.

It sure sounds like the old GM stock is worthless. But it's not quite so.

Motors Liquidation (ticker symbol MTLQQ) continues to trade on the pink sheets market. Companies on the pink sheets are not required to file with the SEC. Usually companies are on the pink sheets because either they are too small to be listed on a national exchange or they do not wish to make their budgets and accounting statements public.

Motors Liquidation shares are currently trading around 50 cents.

In general, you can't claim a loss on a stock unless you sell the shares. You then have a capital loss in the amount that your adjusted cost basis exceeds the sale price.

What if the company in which you own shares goes bankrupt and its shares are not trading any more? In that case, you can't sell in order to recognize a loss. If you invested in something that is now worthless, you would at least like to be able to deduct the loss, wouldn't you?

You can. There is an exception to the general rule that you can't claim a loss on a stock investment until you sell the shares. You can take a loss for a worthless security.

A worthless security can be stock, stock rights or a bond. If the security became completely worthless during the tax year, you can take a loss treating the security as if it were sold for $0 on the last day of the tax year. The holding period for determining whether or not the loss is short-term or long-term is determined by considering the last day of the year as the sale date.

The IRS is very strict in determining when a security becomes worthless. Losses must be claimed in the first year an identifiable event occurs proving the security is worthless. There must be no reasonable possibility of the security regaining any worth. No losses are allowed for partial worthlessness. The burden of proving worthlessness is borne by the taxpayer.

The problem with shares in Motors Liquidation is that they have a market value. It's not rational. These shares have literally no claim on the assets or earnings of the new General Motors.

Despite the fact that the shares will never give anyone any equity in the new GM or any rights, income, or even a whiff of a profit, there is a market in the shares. And if there is a market, they are not worthless.

Until the Motors Liquidation shares are sold, there is no loss to report on Schedule D of the 1040.

It's too late for 2009, but if you sell it now, you can take it as a capital loss on your 2010 Form 1040. The cost basis from your GM shares transfers over to the shares in Motors Liquidation.

If you sell your shares, you may be able to use your losses in Motors Liquidation to offset some capital gains or up to $3,000 of ordinary income on your 2010 tax return.

If the shares are in your IRA or other retirement plan, make sure you distribute the shares from the plan first. You can't take the loss inside the plan.

If you want to sell old GM stock in 2010, you can get more information at www.motorsliquidation.com. Click on Investor Information.

Patti@spencerlawfirm.com

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