Uncle Sam Refuses To Pay For Old GM Stock, Probably…

With tax returns due two months from today, many investors remain confused as to what to do with their “worthless” (read on) stock in the Old GM. Many people thought that, like governments and their debt, shares of the Big Three automakers would always have some value, or in the very least, if any of those entities were to go belly up, the value of their shares would be the least of their worries. Moreover, there was some perception that the US government would intervene to save shareholders. Indeed, the government intervened to save The General, but did little to buoy investors interests. These misperceptions partly explain the prevalence of outstanding GM stock despite the disappearance of the historic, “GM” stock ticker symbol. Sort of.

Motors Liquidation

The New York Stock Exchange ceased trading shares of Old GM on June 1, when The General initiated its bankruptcy reorganization. Securities and Exchange Commission regulators cautioned, “In most instances, the company’s plan of reorganization will cancel the existing equity shares.” Ultimately, Old GM shares were converted to shares in Motors Liquidation. Those shares are still traded. Despite SEC warnings, nest-egg-builders and professionals alike continued to buy that stock last summer, momentarily spiking its price to $1.21 per share, up almost 40 percent in a day. In itself, this price anomaly illustrates confusion.

Somewhat intuitively, the investors who take on the most risk can expect to be paid back last in the event of bankruptcy. That means that that equity share holders are usually paid back after debt holders, if at all. A share in a company, a promise to pay a portion of profits, should be near worthless for a bankrupt company because any profits first go to paying off suppliers, debt holders, et al. Moreover, shares in Motors Liquidation will emphatically not be exchanged for stock in the New GM when it makes its IPO later this year.

Tax Write Off

It seems that bad news should lead to some good news: a 2009 tax write off. For the non-financially minded, a tax write off of this sort is valuable because investors are ultimately required to pay income (in this context, called capital gains) tax on gains from price increases in their assets, including corporate stock. But that calculation is a two-way street: If one makes $100 in company A, but loses $75 in company B, one is only responsible for tax on the $25 net gain.

Wothless?

But here too, there are caveats. From the perspective of the tax code, “worthless” is interpreted literally. If the price of a share were $0.00, then there is some recourse. An individual holding such an asset could solicit documentation from his/her broker indicating that the asset is worthless. Such letter justifies writing ‘worthless’ when tax forms ask about the sell price of a stock, representing a loss. However, that is not applicable for GM stock.

If the shares are being traded at any non-zero price, as Motors Liquidation shares currently are, then they have some value. And as every bad day trader knows, mere changes in market price do not constitute a capital gain or loss. The gain or loss is reported in the year the asset is sold. Absent selling, or even trying to sell the asset, there is no loss to report on Schedule D of the 1040 tax form. So unless an investor sold his/her Motors Liquidation stock last year, there is no tax write off to be had this April. More information about selling these shares in 2010 can be found here.

And Then…

One final wrinkle: GM 401 (k) plans were sold in 2008, so employees might not find themselves in this category at all. One note for any with a job and investments: from the perspective of portfolio diversification, it seems silly to buy stock in the company for which you work. Your financial situation is already so heavily tied to the fate of your employer, there is no reason to set yourself up for both loss of income and loss of stock value should things head south.

DISCLAIMER: GM Authority is not in the business of giving tax advice. We just call the shots as we see them. For specific tax advice, please consult your tax professional.