Help with stock+cash merger acquisition

[Vikas]

I thought I used to know this stuff but the way E-Trade is doing it does not seem to be right.

On 5/31/2013 CYMR got acquired by ASML
- each CYMR stock got 1.502 + $20 share
This merger qualifies as tax-free reorganization within the meaning of Section 368(a) pf the Internal Revenue Code of 1986

Supposed I had purchased CYMR #100 shares on 1/1/2004 when the stock price of CYMR was $50. So my cost was $5000

ASML was trading at $100 for 5/31/2013

#100x1.1502 = #150.02

So now my account will have #150 ASML + $2000 + 0.02 aka fractional share of ASML

For the fractional share, I get the cash; so that will be $2

So now I should have in my account
#150 ASML + $2000 + $2 == valued at (15000 + 2002 ) = $17002

The 1099 form will show $2000 long term capital gain with CYMR being sold for $7000 because my cost was $5000

So far so good.

Now my cost for the ASML should be $7000 but the brokerage has done some crazy stuff with the new ASML shares and split them in two lots and has allocated some crazy cost basis which unfortunately is no longer editable.

 

[gfh77665]

What is your question?

 

[R80RS]

Originally Posted By: Vikas


Now my cost for the ASML should be $7000 but the brokerage has done some crazy stuff with the new ASML shares and split them in two lots and has allocated some crazy cost basis which unfortunately is no longer editable.


Can you explain your situation a little better than "the brokerage has done some crazy stuff" and "allocated some crazy cost basis"? Hard to answer the question when it is stated so opaquely.

 

[Vikas]

Let us start again; I had some calculation errors in the above.

#100 CYMR @$50.00 per share; my Cost basis $5000

Conversion Formula = 1.1502 + $20

Converted in to = #115.02 ASML @$100 per share + $20x100 cash

Which is= #115 ASML + $2000 + $2(cash for the fractional share)

Taxable Gain portion of the conversion = $2000

The basis for the converted #115 ASML should be (5000 original + 2000gain) == $7000 cost basis going forward

Etrade has split the converted #115 ASML in to two lots:-
1) #15 ASML basis 0 2) #100 ASML basis $5000
This makes no sense at all. I hope this is clear.

The question is:- Etrade seems to be reporting wrong cost for the converted shares and I would run in to problems when I disposed them off later.

 

[99Saturn]

Originally Posted By: Vikas
The basis for the converted #115 ASML should be (5000 original + 2000gain) == $7000 cost basis going forward

Etrade has split the converted #115 ASML in to two lots:-
1) #15 ASML basis 0 2) #100 ASML basis $5000 div>


Maybe I'm missing something (it's early and I've yet to have coffee). Total cost basis should be the original cost basis, $5000 no? The $2000 will be a gain (with a $0 cost basis) and the 115 shares of ASML should have a cost basis of $5000 (I would have thought ($5000/115 shares = ~$43.48 a share).

Worth a call to Etrade to get an explanation? I had this once with a different merger (ESRX & MHS) and had shares across 2 different institutions - frustrating to see both apply a different formula initially.

If you don't mind sharing, did you sell all shares already or are you still holding (ie are you concerned with the cost basis only or the impact in the future if you are only selling shares in lots (not selling all 115 shares at once)? Is the purchase date associated with the 15 shares the same as the purchase date of the 100 shares (or weighted correctly in lots across purchase dates of lots that make up the 100 shares)? Good luck.

 

[Vikas]

I am holding the shares. However, logically the shares got swapped, so the sale was virtual. The $2000 is the real cash and obviously, IRS wants their flesh.

So from my perspective it should be equivalent to, $5000 worth of shares got sold for $7000 netting me $2000 but then I took the $7000 and bought the other stock. Or am I doing it wrong?

 

[Sam2000]

The acquiring company valued your stock holding at $11502 (new stock) + $2000 (cash) = $13502.

There is no gain to pay on the new stock but there is on the cash as this is a realized gain.

The cash portion is $2000/$13502 = 14.8%

So your basis needs to be split by this percentage.

The basis for the portion you got in cash is $748.63 ie $5000 x 14.8%.

So you have a realized taxable gain of $2000-$748.63=$1251.37

The basis for your new 115 shares is $5000-$748.63=$4251.37.

I didn't account for the fractional share element.

Is this similar to what etrade are saying?

 

[Sam2000]

Note that the etrade basis of 100 shares at $5000 and 15 shares at $0 is similar to my own calc that 115 shares now have a basis of $4251.

I sense they are allowing you to change the basis of the 15 shares depending on how you treat the $2000 cash.

I feel that the $2000 cash is not a $2000 gain but has a basis related to the % of stock holding it represents as in my previous post.

 

[99Saturn]

Originally Posted By: Vikas
I am holding the shares. However, logically the shares got swapped, so the sale was virtual. The $2000 is the real cash and obviously, IRS wants their flesh.

So from my perspective it should be equivalent to, $5000 worth of shares got sold for $7000 netting me $2000 but then I took the $7000 and bought the other stock. Or am I doing it wrong?


I dug around a little bit and found 2 documents:
http://www.asml.com/doclib/investor/misc/asml_20130611_Attachment_to_IRS_Form_8937_Cymer.pdf
^ This points to a prospectus dated Oct. 16 2012 for further information.
Link to prospectus.

This is probably the best place to start, I'll give you my opinion below but it's just that my opinion.
---
My opinion: I would doubt the last section which I italicized - it sounds like you put the $2,000 in your pocket in cash (even though you may have reinvested it).

You owned some CYMR which you paid $5000 for. That CYMR converted to ASML & cash. Whatever the ASML & cash is worth today, you still paid $5000 for. In addition, the purchase date on the ASML & cash should be the original purchase date of the CYMR shares you bought (this might not be the best phrasing but you are "grandfathered" to the purchase date so when you sell one day, your original purchase date determines long term vs. short term and gains).

Question comes up of what was cost basis on the $2000. Did this all happen last year? If so, how does your 1099 treat that $2000? When I glanced through the prospectus it seemed to me like the $2000 cash should be treated as a dividend.
^Maybe I'm skewed in my thoughts - what I just laid out above is exactly how it played out the last time I held shares that were involved in an acquisition that was made up of shares & cash.

Past that, I do find it strange that the cost basis is listed as 0 for the 15 shares and $5000 for the 100 shares, again, I would have thought you'd divide the $5000/115 on a per share basis (I'm thinking of the possibility of selling the shares as two lots, maybe I'm over thinking things).

Again, good luck - hopefully one of the accountants/financial advisers that is on here can throw in their

.

 

[Vikas]

I have been reading that ASML document since yesterday and still can't really decipher it completely. I wish they had given few examples. Etrade has sent me "2013 GROSS PROCEEDS" which shows the cash portion $2000 under "Box 2a Sales price".

Sam, I have never remember doing the type of cost apportioning that you are doing. I remember when DEC was bought out by CPQ which had both stock and cash portion I don't recall that type of calculations. There must be a IRS document giving some examples to clarify the tax consequences of these transactions.

Saturn, you are right and I can not add $2000 to my cost basis. That will be double dipping. So going forward, the ASML stock still has the old cost basis and hopefully the old acquisition date. I also believe that actual ASML exchange price is not really material in this calculations, so my simplified assumption of $100 ASML price should not cause any errors in the final outcome.

Now the question is how do I report this $2000 cash portion? I think it should be treated as long term gain either as ($7000 - $5000) or ($2000 - 0). This is tax free reorganization, so I don't think the $20/share cash is to be considered as dividend. As far as I can see, it is not listed on my 1099-DIV
======================
From asml pdf document
======================
In general, each Cymer shareholder will recognize taxable gain equal to the lesser of (1) the amount of cash received in the exchange and (2) the amount, if any, by which the sum of the cash received plus the fair market value of the ASML ordinary shares received in the exchange exceeds the Cymer shareholder’s tax basis in the Cymer shares surrendered in the exchange.

For purposes of calculating the taxable gain, if any, the amount of cash received in the exchange does not include cash received in lieu of a fractional ASML ordinary share.

 

[Sam2000]

http://fairmark.com/capgain/mergers.htm

 

[99Saturn]

Isn't the $2000 cash detailed in the 1099 under a section for 1099-B?

I'd agree with what you said about about it being a capital gain (and think it would follow the acquisition date of the original lot(s) for long term vs. short term).

And yeah, an example calculation would sure be nice, though the vagueness is I'm sure intentional.

 

[Sam2000]

The link I provided fits Vikas' situation and has an example.

 

[Vikas]

Sam, that example is not internally consistent or I am reading it wrong. It starts with
"shareholders of AirTouch received .5 shares of new Vodaphone AirTouch ADS plus $9.00 in cash for each common share they owned."

But then says
"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."

What is "merger consideration"? Is that the price of the new stock? If so, wouldn't he get 50 shares of the new stock? Interestingly, the new stock price is not mentioned at all.

But at least the cost basis of the new security and gains to report from that example uses the same principle as put by Saturn and makes logical sense to me. In principle where there are substantial paper gains, the cost basis just carries over to the new security and the cash portion gets reported as long term capital gains.

Fairmark site explains the fractional share cost basis well but I suspect that is because that example does not have stock+cash deal. In any case, the fractional share amount is small, so any error will be minuscule.

I also found another website but that makes it way complicated and I am not even sure if it is right.
http://www.wikihow.com/Adjust-Cost-Basis-After-a-Merger
I am in the process of running their numbers using the simpler scheme and see if they are in the ballpark.

I sure hope I don't have to force HR Tax software to handle this case correctly if I take their interview method.

 

[Vikas]

Originally Posted By: Sam2000
Note that the etrade basis of 100 shares at $5000 and 15 shares at $0 is similar to my own calc that 115 shares now have a basis of $4251.
This I do not understand. I do not see how you can come up with the number 4251 by splitting the lot.

 

[Sam2000]

According to the Fairmark article, this is what you would do:

Step 1: Your total consideration is $13500. Your gain is $13500-$5000=$8500

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.

So your reportable gain is $2000

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.

So $5000+$2000-$2000=$5000

Looks like the numbers in etrade are correct.

Please ignore my earlier example as that is how it works in another country.

 

[Vikas]

Thank you! Looks like it now all makes sense.