"Cash in Lieu" payments are often
received by investors and appear as
"CIL" on the Form 1099-B report
of sales proceeds at year end.
These are payments received for
fractional shares as a result of stock
splits, corporate mergers, exchanges,
and reorganizations.
When the exchange ratio or split does
not result in a whole number of new
shares, the left-over fraction is paid
in cash after the transfer agent combines
all the fractional shares and sells them
in the open market.
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Many people simply report the payment as sales proceeds with zero cost and
pay capital gains tax on the entire amount. The proper method, which also
achieves tax savings, is to allocate your adjusted cost basis to the fractional
shares and pay capital gains tax only on the gain or loss.
You can use the calculators on this website to compute the cost basis of your
fractional share based on the type of transaction that produced it. An "all stock"
merger, a "stock & cash to boot" merger, a stock split, or a spinoff can all result in
fractional shares.
Here is an example of the actual calculations:
You own 75 shares of Company XYZ, and a 50% stock dividend has just been
declared. You are entitled to receive 37.5 shares, but the company will only
issue whole shares. You therefore receive 37 shares, plus a cash in lieu payment
of $10.00 for the 1/2 share. Your adjusted cost basis for the initial 75 shares was
$1000.00.
After the stock split, you own 75 plus 37.5 shares, for a total of 112.5 shares.
Your adjusted cost basis per share is $1000.00 divided by 112.5 shares, or $8.89
per share.
The cost basis allocable to the fractional .5 shares is $8.89 x .5 = $4.44.
The net gain to be reported on your Schedule D for the cash in lieu payment
is therefore $10.00 less $4.44 or a net gain of only $5.56.
Instead of being taxed on $10.00, with a little effort on your part to allocate your
cost basis to the fractional share, you will be taxed on only $5.56 of gain.
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