Cash merger proceeds

[Jesse]

ADESSA, Inc merged with KAR Holdings, Inc and stockholders received cash merger proceeds of $27.85 per share. My client had 1,000 shares and received a check in April for almost $28,000.

If the original stock was purchased in 1986 would this be a long term capital gain? If not how would you treat the cash merger proceeds received?

[OldJack]

More details are needed.

1) Did your client that received the merger proceeds also receive shares of stock in KAR Holdings, Inc.?

2) It appears the merger was "Type A" statutory merger [see flowchart in Small Business Quickfinder Handbook, page 12-33]?

Code sec. 368(a)(1)(A thru(G) describe 7 types of tax-free reorganizations. Thus 368(a)(1)(A) is a Type A mergers that generally is an exchange of stock for stock by the shareholders, however, the transaction will retain its tax-free status if money or other property (boot) is distributed in addition to stock [Reg. 1.368-2(B )], but gain might be recognized on the portion of the consideration that is boot [Tax Planning for Business Quickfinder, page 12-24].

Generally gain to be recognized is the "lesser" of (1) FMV of KAR Holdings less ADESSA stock-Basis, or (2) The $27.85 per share boot received [see example in "Tax Planning for Business Quickfinder, page 12-24"]. Yes, the taxable gain is reported on 1040 Sch-D, with a holding date of his ADESSA stock in 1986.

[OldJack]

I guess I should have pointed out also that you need to know the full FMV of the shares involved that determined the $27.85 per share boot which is in reality a fractional sale of shares. The ratio of the boot to the FMV determines the ratio of ADESSA, Inc "stock cost basis" that can be allocated to the fractional sale. Thus, although the $28,000 is reported as the sale price on 1040 Sch-D, there should be some percent of ADESSA basis allocated to determine taxable gain. In many cases the original basis of the selling/merging stock is so low that the amount allocated is commonly ignored and the full boot is simply reported as the gain or as in some cases it is called cash in lieu.

[BJM]

I just received a corrected 1099-B from a client due to the merger of Whirlpool with Maytag. There were 3 transactions listed, one was the numeber of shares of Maytag surrendered with the cash proceeds received for those shares in the merger, I treated those shares as a sale with the Maytag stock basis and holding perioed. Then next transaction was Whirlpool Stock received for surrender of the Maytag stock, I treated this as a sale using the shares of Whirlpool value at the time of the exchange less the basis of the Maytag stock and holding period. The last transaction was cash for sale of a fractional share for a small amount of $42.49. Reported all as a sale on Sch D. Client will be happy though, resulted in loss and he gets a refund. Just make sure and keep note of the basis of the new stock received if it was not sold at the same time.

[OldJack]

BMJ... maybe I don't understand, doesn't your client still own the new shares of Whirlpool or did the client also sell those shares after the merger during the same year? If your client still holds the new shares received you got a problem with reporting them as sold.

As to the fractional shares, since the sale amount is not insignificant they should have a portion of Maytag cost basis allocated for sale reporting on Sch-D, thereby changing the carryover cost basis of the received stock of Whirlpool shares.

Of course if all shares were sold in the same year it would all wash out with the proper net gain/loss on the Sch-D. It is certainly unusual for there to be a loss on merger transactions.

[BJM]

BMJ... maybe I don't understand, doesn't your client still own the new shares of Whirlpool or did the client also sell those shares after the merger during the same year? If your client still holds the new shares received you got a problem with reporting them as sold.

As to the fractional shares, since the sale amount is not insignificant they should have a portion of Maytag cost basis allocated for sale reporting on Sch-D, thereby changing the carryover cost basis of the received stock of Whirlpool shares.

Of course if all shares were sold in the same year it would all wash out with the proper net gain/loss on the Sch-D. It is certainly unusual for there to be a loss on merger transactions.

I probably worded that wrong. I didn't report the Whirlpool as sold, he still has those. I just reported the Maytag as sold. I did allocted the fractional share, just didn't complete that sentence.