Entering stock merger( Cash + stock)


M

MedRxman

Using Quicken 2005:
How would I enter the following transaction.

I own 1000 shares of company A

Company B had a merger(buy out) of company A as follows:

Company B paid to shareholoders of Company A, $17/share for the Company A
shares plus 0.5 shares of Company B for each share of Company A.

================================================

(I made up the numbers to make calculation easier but the merger I am
talking about is the Federated-May merger). A work sheet was/is not provided
on the investors relation site of the home page of Federated.
 
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H

Hank Arnold

I'm interested, also. I currently have it as a Corporate Acquisition for the
shares and a Return on Capital for the $$.
 
M

Mike B

MedRxman said:
Using Quicken 2005:
How would I enter the following transaction.

I own 1000 shares of company A

Company B had a merger(buy out) of company A as follows:

Company B paid to shareholoders of Company A, $17/share for the
Company A shares plus 0.5 shares of Company B for each share of
Company A.
================================================

(I made up the numbers to make calculation easier but the merger I am
talking about is the Federated-May merger). A work sheet was/is not
provided on the investors relation site of the home page of Federated.
In this thread (http://tinyurl.com/8oavt), there are two methods described
(albeit for a different stock) - the Return of Capital method and also by
JR7107 a different treatment that is apparently more tax-friendly.
 
M

MedRxman

Mike.
The link did not work. Thanks anyway
(took me to quicken forums with an error)
 
M

MedRxman

Until a worksheet is provided I think this woujld work..Your thoughts,
Mike..

===============================================
For argument sake lets say that the value Company B stock is $20/sh on day
of distribution.

We would then get 500 shares of Company B valued at $ 20/share
10000.00



We would get $17/share for Company A
17000.00



Total value of transaction
27000.00



Company A is worth 62.96 % of the total

Therefore edit the cost basis of Company A (cost*.6296) in Quicken and do a
sale of the 1000 shares at $17/share for a true capital gain.



Company B is worth 37.04% of the total

Therefore multiply the original cost basis of Company A by 0.3704 and in
Quicken add shares for Company B and use the original acquisition date of
Company A so as to ensure a correct holding period. If any fractional shares
are involved they can now be sold .
 
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R

R. C. White

Hi, MedRxman.

I suppose you saw this paragraph at
http://www.fds.com/ir/maymerger/shareholders/:

"Investors who are registered holders of May common stock will receive a
packet of information in the mail from The Bank of New York within
approximately two weeks of the August 30, 2005 Effective Date of the merger.
This packet will have information on how to exchange May common stock for
the merger consideration, which is $17.75 in cash and 0.3115 shares of
Federated Department Stores, Inc. common stock, plus cash in lieu of
fractional shares, for each share of May common."

You should have received that packet Tuesday - or Real Soon Now. That
should include this not-very-helpful paragraph on Page 7 of the
"Instructions, including questions and answers":

"12. What are the tax consequences of the merger to shareholders ?
"The cash portion of the exchange is expected to be subject to United States
federal income tax at the capital gains rate. Shares of Federated Stock
issued in the exchange will generally not be subject to any gain or loss for
United States federal income tax purposes. You should review the joint proxy
statement/prospectus that you received before the July 13, 2005 shareholder
meeting and consult your tax advisor for information relating to your
specific situation."

Unfortunately, all the info I've seen so far on their website focuses on
urging May Co. shareholders to sign up for Federated's Dividend Reinvestment
Plan, rather than explaining shareholders' tax treatment in reasonable
detail.

There's no way that even a tax expert can advise you on this transaction
without knowing the specific terms of the transaction INCLUDING any special
ruling from the IRS that the company's attorneys probably received before
the deal was done. Chances are, those attorneys very carefully structured
the transaction so that it would fit within some specific section of the
Internal Revenue Code, then got the IRS ruling that, yes, if carried out in
exactly that way, it would so qualify. But the only way to find out those
details is in official company documents.

Mergers can happen in dozens (hundreds? thousands?) of different ways. Tax
treatment of the shareholders depends on which of those ways are used for
THIS merger. It does us no good to see how some other companies did it, or
how this company managed some earlier merger.

My GUESS, based on the two paragraphs quoted above, is that you would first
record the $17.75 per share cash as a Return of Capital, reducing your basis
on each share. If you had purchased a share for $50, your new basis in that
share would be $32.25. If you purchased another share for $10, your basis
in that would be reduced to zero, plus you would report a $7.75 long-term or
short-term capital gain on that share. You could not simply report that you
sold that share for $17.75 because you still own the share - until you
exchange it for 0.3115 share of Federated. You cannot have a "negative
basis" in the May stock but it can be zero, so if your basis is reduced to
zero, any excess is recognized as a gain.

After reducing your share-by-share basis by $17.75 (or to zero), report the
exchange of your shares for Federated shares, using Quicken's Corporate
Acquisition (stock for stock) screen. Your old basis will be allocated
among the Federated shares (including fractions) that you are entitled to
receive. If you are entitled to a fractional share, then record sale of the
fraction immediately AFTER the merger for the amount of cash you receive for
it. (We've never understood why Quicken asks for the price of the acquiring
company; it doesn't matter here.)

Remember that this is my GUESS, based on what little clues we have so far.
It is subject to revision as we learn more. You should consult your own CPA
when you have the documents from which a proper analysis can be made. I've
been retired for more than a decade and tax rules change daily.

When you have the answer, please post it - or a pointer to it - here because
I'm sure many other readers will also need to know.

(see the PS below):

RC
--
R. C. White, CPA
(Retired - no longer licensed to practice)
San Marcos, TX
(e-mail address removed)

PS: I looked a little further and found these daunting paragraphs on page
94 of the Proxy filing (DEF 14A(FDS) 5/27/05 - about the 10th item on this
page: http://www.fds.com/ir/maymerger/sec/. I THINK it translates to about
what my GUESS above says:

Federal income tax consequences to May stockholders if the merger is
consummated as currently anticipated
The following discussion assumes that the exchange of May common stock
for Federated common stock pursuant to the merger will constitute a
reorganization within the meaning of Section 368(a) of the Code.
A holder of May common stock who receives cash and Federated common
stock in the merger will recognize gain equal to the lesser of (i) the
excess of the sum of the fair market value of the Federated common stock
received by the holder in exchange for May common stock and the amount of
cash received by the holder (excluding any cash received in lieu of
fractional shares) in exchange for May common stock over the holder’s tax
basis in the May common stock and (ii) the amount of cash received by the
holder in exchange for May common stock (excluding any cash received in lieu
of fractional shares). No loss will be recognized by holders of May common
stock in the merger, except, possibly, in connection with the receipt of
cash in lieu of fractional shares, as discussed below. The gain recognized
will be capital gain unless the receipt of cash by the holder of May common
stock has the effect of a distribution of a dividend, in which case the gain
will be treated as ordinary dividend income to the extent of the holder’s
ratable share of accumulated earnings and profits as calculated for United
States federal income tax purposes. In determining whether a holder’s
receipt of cash has the effect of a distribution of a dividend, the holder
will be treated as if it first exchanged all of its Federated common stock
for May common stock and then Federated immediately redeemed a portion of
the May common stock for the cash that the holder actually received pursuant
to the merger agreement. The IRS has indicated in rulings that any reduction
in the interest of a minority stockholder that owns a small number of shares
in a publicly and widely held corporation and that exercises no control over
corporate affairs would result in capital gain as opposed to dividend
treatment. In determining the interest of a stockholder in a corporation,
the constructive ownership rules that apply for United States federal income
tax purposes must be taken into account. This same analysis could apply to
cash received by a holder of May common stock in lieu of fractional shares.
Any gain recognized by a holder of May common stock will be long-term
capital gain if the holder’s holding period of the May common stock is more
than one year. Capital gains of individuals derived in respect of capital
assets held for more than one year are eligible for reduced rates of
taxation. The aggregate tax basis of the Federated common stock
received(including fractional shares deemed received and redeemed as
described below) will be equal to the aggregate tax basis of the May common
stock surrendered, reduced by the amount of cash the holder of May common
stock receives (excluding any cash received in lieu of fractional shares),
and increased by the amount of gain that the holder of May common stock
recognizes, but excluding any gain or loss from the deemed receipt and
redemption of fractional shares described below. The holding period of
Federated common stock received by a holder of May common stock in the
merger will include the holding period of the holder’s May common stock.
Cash received by a holder of May common stock in lieu of fractional
shares will be treated as if the holder received the fractional shares in
the merger and then received the cash in a redemption of the fractional
shares. The holder should recognize capital gain or loss equal to the
difference between the amount of the cash received in lieu of fractional
shares and the portion of the holder’s tax basis allocable to the fractional
shares. Under the circumstances described in the preceding paragraph, the
receipt of cash in lieu of fractional shares could also have the effect of a
distribution of a dividend.
 
M

MedRxman

Thanks for the reply R C. Yes I saw it , but believe it or not some one at
FD's Investors Relations told me there would not be a worksheet. I have
since proven that statement incorrect and am awaiting the packet and/or
posting of a worksheet on the web site of Federated.
 
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R

R. C. White

Hi, MedRxMan.

Thanks for that link. It sounds right to me. It appears my original GUESS
was wrong and you should ignore it.

I still would be interested in the "official" worksheet that you receive
from Federated. Could you please post it here - or post a link to it - when
it becomes available.

RC
 

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