The tax rules depend on the reason you received cash.
What happens when you hold stock in a company that merges into another one? There are different tax rules for various situations, so we’ll make some simplifying assumptions:
- The merger qualifies as a “tax-free reorganization” under the tax law. That’s usually the case if at least half the consideration you receive is in the form of stock.
- The only consideration you receive in addition to common stock of the acquiring company is cash.
Cash in lieu of fractional shares
If the number of new shares you’re supposed to receive isn’t a whole number, you’ll probably receive cash in lieu of (instead of) the fractional share. You’re treated as if you received the fractional share and then sold it for the amount of cash you received. You have to allocate a portion of your basis to the fractional share.
Example: Suppose the formula used for the merger would have given you 144.25 shares. You ended up with 144 shares plus cash for .25 shares. Divide the total basis of your old shares by 144.25 to get the basis per share of the new shares. Your basis for the fractional share you “sold” is .25 times the basis per share.
In some mergers, part of the consideration is provided in the form of cash. For example, in a 1999 merger, shareholders of AirTouch received .5 shares of new Vodaphone AirTouch ADS plus $9.00 in cash for each common share they owned. Here’s how you figure your gain:
- Step 1: Determine the overall gain you have on the exchange. To do this, you need to know the value per share of the merger consideration, including both shares and stock. Generally the company gives you this information at the time of the merger. If you can’t find this information, it’s likely to be on the company’s web site. Multiply that figure times the number of shares you held to determine the total consideration you received. Then subtract your total basis in the shares you held to get the overall gain.
- Step 2: The amount of gain you report is the lesser of the amount of gain from step 1 or the amount of cash you received.
- Step 3: Your basis in the shares you received is equal to your basis in the old shares, increased by the amount of gain you reported and decreased by the amount of cash you received.
Example: Suppose you held 100 shares of AirTouch common before the merger. The merger consideration was $107.50 per share, so your total consideration was $10,750, of which you received $900 in cash.
If the total basis in your AirTouch shares before the merger was $8,000, your gain was $2,750. That’s more than the amount of cash you received, so you report gain of $900, and your basis in the new shares is $8,000.
If the total basis in your AirTouch shares before the merger was $10,000, your gain was $750. You report only $750 of gain, even though you received $900 in cash. The other $150 reduces your basis in the new shares to $9,850.
Finally, if the total basis in your AirTouch shares before the merger was $12,000, you have a loss on the merger transaction. You can’t report this loss on your return, but you get to receive the $900 without reporting any gain at all. This reduces your basis in the new shares to $11,100.