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Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
schedule d/merged stock/redemption of shares
Posted by: leo822, March 28, 2008 02:26PM
I purchased on 11/09/07, 7 shares of stock @ 126.50/share +\$7.00 trade=\$127.50 cost basis.= \$ 892.50 total.
The company merged 12/5/07 with another and redeemed \$231.21 (7 shares x \$33.03=\$ 231.21. (1099b shows 231.21 is gross proceeds less commiss.)
Also a fractional share of .8972
Fractional share:\$137.50 x .8972= \$123.36 also shown as gross proceeds.
Now I am left with only 4 shares @ I think \$ 135.03 each, not sure.
According to an example at the company's web...I am to add the 231.21 +123.36 = \$354.57 and subract the cost basis using the following formula.
.31 x \$127.5 x 7= \$276.67 cost basis.

Therefore, \$354.57 - \$276.67 = \$77.90 gain
But since the proceeds are listed separatly HOW DO I SEPARATE THE GAIN? I am thinking \$137.50 (the share price at time of merge used to calculate the fractional shares.so, \$137.50 - \$123.36 = \$14.14
And \$63.76 gain on the 231.21 amount. BUT I STILL THINK I AM PAYING ON MY OWN MONEY...IS THERE REALLY A GAIN???

Re: schedule d/merged stock/redemption of shares
Posted by: LJM, March 28, 2008 04:08PM
A. The "merger cash" should be reported on Form 1040 Schedule D, but is a "return of capital" and thus "not taxable".
B. The "cash in lieu of fractional shares" is a gain of \$2.21

--------------
Taxability is based on one of 3 scenarios based on the "merger consideration value" (cash + value of stock received) compared to your basis:
1. 100% capital gain: Merger consideration minus basis more than cash value received.
2. Part "capital gain" and part "return of capital": Merger consideration minus basis less than cash value received but more than zero.
3. 100% return of capital: Merger consideration minus basis less than zero.

You pay NO tax on the part that is "return of capital".

FACTS:
a. 7 shares OLD RIG: Basis \$892.50
b. Basis date 11/9/2007
c. \$33.03 cash per share of OLD RIG
d. 0.6996 shares of NEW RIG per share of OLD RIG
e. 11/27/2007 first day of trading of NEW RIG
f. NEW RIG opening price on 11/27/07: \$133.38 per share
g. \$123.36 cash in lieu of 0.8972 shares

Some of the above information obtained from:
Chicago Board Options Exchange Research Circular #RS07-1014
[search.cboe.com]

CALCULATIONS:
Original basis: \$892.50 [for 7 OLD RIG]
Basis per share: \$127.50 [= \$892.50 / 7]

NEW RIG stock received: 4.8972 shares [= 7 x 0.6996]

Cash received: \$231.21 [= 7 x \$33.03]
NEW RIG stock value: \$653.19 [= 4.8972 x \$133.38]
Merger value: \$884.40 [= \$231.21 + \$653.19]
Merger value minus basis: MINUS \$8.10 [= \$884.40 - \$892.50]

Since the "Merger Consideration" minus your "Cost Basis" is less than zero, the cash is 100% "return of capital".

--------------
MERGER CASH:
Report the "merger cash" on Schedule D line 1 (short term gain or loss) as follows:
a) [Description] RIG cash merger
b) [Date Acquired] 11/9/07
c) [Date sold] Date on 1099-B
d) [Sales price] \$231.21
e) [Cost basis] \$231.21
f) [Gain] \$0.00

Your "basis" must now be reduced by the \$231.21 return of capital.
NEW BASIS for 4.8972 shares: \$661.29 [= \$892.50 - \$231.21]

--------------
CASH IN LIEU OF FRACTIONAL SHARES:

BASIS for 0.8972 shares: \$121.15 [= \$661.29 x 0.8972 / 4.8972]
BASIS for remaining 4 shares: \$540.14 [= \$661.29 x 4 / 4.8972]

Report the "cash in lieu of fractional shares" on Schedule D line 1 (short term gain or loss) as follows:
a) [Description] RIG cash merger
b) [Date Acquired] 11/9/07
c) [Date sold] Date on 1099-B
d) [Sales price] \$123.36
e) [Cost basis] \$121.15
f) [Gain] \$2.21

Lewis

Re: schedule d/merged stock/redemption of shares
Posted by: leo822, March 28, 2008 04:39PM
Thank you so much...

I should have told you it was RIG...I'm surprised you found that out!

You're a gem!

Re: schedule d/merged stock/redemption of shares
Posted by: LJM, March 28, 2008 05:17PM
You just made it a little more challenging by omitting the name.

The CBOE (Chicago Board Options Exchange) tracks mergers of most big companies (because of changes to options). I knew the merger date and the merger conversion ratio and cash amount received.

Lewis

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