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 .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.
|
