Sometimes a corporation goes through a merger where you receive stock in a new company plus some cash. The cash part is called "cash to boot" since you got it in addition to the new stock.
There are at least four ways that such a merger can be taxed: 1. Normal "cash to boot" rules 2. Fully taxable 3. Redemption 4. Dividend to extent of E&P (earnings and profits)
Our handy "cash to boot" calculator has some recent cash and stock merger transaction data ready for you, such as the Nicor merger with AGL. If you have other transactions with cash to boot that you would like to have added to our calculator function, please send us an e-mail.
Some cash to boot mergers involve the receipt of multiple securities with the cash, or alternate securities other than the buyer's common stock. See our Multi Merger Calculator for this type of merger. Recent examples are the Virgin Media merger with Liberty Global and the El Paso Corp merger with Kinder Morgan.
We have developed a special purpose calculator for the Burlington Northern Santa Fe merger with Berkshire Hathaway because two classes of Berkshire stock were involved in the exchange. (Click on the pictures to access the calculators.)
Normal Cash to Boot Rules The usual "cash to boot" rule is that you only recognize gain on cash and stock mergers to the extent of the "boot" that you received, so that you don't have to pay capital gains tax on non-cash income (one of the few times the IRS is nice to you.)
Cash to Boot Calculator
In the case of a gain, the basis of the new shares received in the corporate cash and stock merger would be the fair market value of the new shares less the amount of gain deferred for tax purposes. The total amount of the gain is calculated as the fair market value of the stock received plus the cash to boot less the adjusted cost basis of the former stock.
The portion of the capital gain to be reported on that year's tax return is the lower of the total gain or the cash to boot. The remainder of the capital gain is deferred and deducted from the fair market value of the new shares to arrive at the cost basis for the new shares.
A non-technical explanation of the normal cash to boot rules is this: "You get cash, you pay tax."
Fully Taxable In some cases the merger is fully taxable, such as theFording Canadian Coal Trust merger with Teck Cominco Ltdor theWyeth merger with Pfizer. This means you must recognize both the cash and the fair market value of the stock received as sales proceeds, deduct your adjusted cost basis, and pay capital gain tax on your true economic gain.
Redemption In a few cases, such as theSchering-Plough merger with Merck, the cash portion of the merger is treated as a redemption (sale) of a portion of the original stock. However, if you owned any of the acquiror's stock (Merck) before the merger, you must meet one of the three tests set forth in Section 302 of the Internal Revenue Code to see if you can treat the cash proceeds as a redemption. These tests are totally beyond the average taxpayer, but that's why we are here. See ourSection 302 Test Calculatorfor help with that.
Dividend to the extent of Earnings and Profits (E&P) If you fail all of the Section 302 tests mentioned above, the cash portion of the merger will be treated as a dividend to the extent of the original stock's accumulated earnings and profits (meaning they had retained earnings on a tax basis.) If the cash portion is more than the E&P, the excess is a "return of capital" until you have recovered all your adjusted cost basis in the original stock. If you still have cash left, the rest is a capital gain. Your cost basis in the new stock is also reduced by the amount that was a "return of capital."
Here's a detailed example of a normal cash to boot merger:
You bought 100 shares of Ocular Science (symbol OCLR) for $24.00 per share on 2/12/2002, for a total cost of $2,400.00. On 1/6/2005, Ocular Science was bought by Cooper Companies (symbol COO) for .3879 shares of COO plus $22.00 cash to boot.
The closing market value of COO was $72.51 per share on 1/5/2005, the last trading day prior to the merger. You also received $57.28 "cash in lieu" for 0.79 fractional shares of Cooper Companies.
What is your cost basis for Cooper Companies?
First we calculate the total economic value (also called "consideration") received:
100 shares of OCLR receives .3879 shares of COO per share, for a total of 38.79 shares of COO. Since the last market value of COO was $72.51 per share, this represents economic value of $2,812.66 for the stock portion. You also received $22.00 cash to boot on 100 shares, for a total cash portion of $2,200.00. Therefore, the total economic value you received for both cash and stock was $5,012.66.
Your total true economic gain is $2,612.66, the total value received of $5,012.66 less the original cost of your shares of Ocular Science, $2,400.00.
However, you only received $2,200.00 of your gain in cash, so you only report capital gains on your tax return of $2,200.00 for this transaction.
What do you do with the rest of your gain, the $412.66 difference between the true economic gain of $2,612.66 and the $2,200.00 taxable capital gain? You subtract it from the market value of your new shares of Cooper Companies, for a cost basis of $2,400.00 ($2,812.66 less $412.66).
Your cost basis for 38.79 shares of Cooper Companies is $2,400.00.
However, the .79 fractional shares are not issued by Cooper Companies but are instead paid to you as $57.28 "Cash in Lieu" of fractional shares (.79 times $72.51). You account for these as follows:
.79 shares sold divided by 38.79 shares owned times total cost of $2,400.00 equals a cost of $48.88 for your .79 shares.
$57.28 cash in lieu received less $48.88 cost equals $8.40 capital gain to report on your Form 1040 Schedule D for the sale of the .79 fractional share.
Your cost basis for the 38 remaining shares of Cooper Companies is $2,351.12 ($2,400.00 less $48.88 cost of the fractional shares sold.)
Note that the IRS regulations do not specify a required method to determine the market value of the new shares received. You can use the market value of the opening, average, or closing price on the day before the merger or the day of the merger. Some taxpayers even use the "volume weighted average price." If it is a taxable cash to boot merger, be sure to use the market value that was used to compute the taxable value on your Form 1099.
We are getting reports from some readers that their brokerage firms are reporting cash to boot merger proceeds as the amount of cash to boot received plus the amount of the cost of their original stock. This is not correct. This is what you should do:
1. Report the sales proceeds exactly as they appear on your Form 1099.
2. Calculate the correct taxable gain using our cash to boot calculator.
3. Deduct the correct taxable gain from the sales proceeds amount.
4. Enter the resulting number as your cost basis on Form 8949.
5. You should then end up with the correct taxable gain being reported for tax purposes.
How to Handle Mixed Elections
In some mergers, shareholders are allowed to mix their elections (for example, part of their shares as a stock election and the rest as a cash election.) The proper result will not be obtained because it does not fit in the standard calculator entries for either stock or cash elections. What you should do in this case is use the Cash to Boot calculator and enter your own data as follows:
1. Add up the whole shares and fraction of a share of the new stock received from both elections. Divide this sum by the number of shares of the old stock that you owned to compute the actual exchange ratio you received. Enter this number on Line 6.
2. Add up all the whole shares of new stock received from both elections and enter it on Line 7.
3. Enter the fraction of a share sold as cash in lieu on Line 8.
4. Add up all the cash received from both elections (except for cash in lieu of fractional shares), divide by the number of shares you sold, and enter the result on Line 9.
5. Enter the cash received in lieu of a fractional share on Line 10.
6. Enter the data on the other lines as described.
7. The calculator should then give you the correct result for your own situation, treating the mixed elections as one single integrated transaction as called for under the Internal Revenue Code.
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email our webmaster @ costbasis.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.