I need advice on upcoming merger/stock sale

[wprien]

Greetings all,
I am new to this group, and have a question regarding the upcoming
merger of May Dept. Stores and Federated Dept. Stores.
I own many shares of May Dept. Stores, who recently sent shareholders a
lengthy report outlining the details of the upcoming merger. As best I
can figure out, at the closing of the deal Federated will "buy out" May
Dept. shares, giving shareholder cash for about half the value of the
shares, and stock in Federated for the remaining value of the May
shares.
It appears that the cash portion would be subject to regular capital
gains taxes. I asked my rep at Schwab how this will happen, and he said
once it's done, I'll have some Federated shares in my account as well
some cash.
The info May sent was detailed but awfully confusing to a layman like
myself. Is there any way I can avoid the gains tax at all?
Any info or advice would be greatly appreciated!

William
(e-mail address removed)

 

[Tad Borek]

I am new to this group, and have a question regarding the upcoming
merger of May Dept. Stores and Federated Dept. Stores.
I own many shares of May Dept. Stores, who recently sent shareholders a
lengthy report outlining the details of the upcoming merger.

It appears that the cash portion would be subject to regular capital
gains taxes.

Is there any way I can avoid the gains tax at all?

William-
The quick answer is yes, the merger is probably going to generate some
capital gains taxes for you, because of that cash. And no, you really
can't avoid the tax at this point, unless you're willing to give the
shares away.

In an all-stock merger you aren't taxed when the shares are swapped out.
When you receive any cash compensation in addition to shares (called
"boot" in tax law) the boot is generally taxable. So when MAY
shareholders get the boot, there's going to be some taxes as a result.

How much is taxable depends on the cost basis of your MAY shares and the
final value of the merger (and whether the merger goes through the way
they're planning, but let's assume it will). It could be as much as the
entire cash payment received - taxed at capital gains rates. You look at
your unrealized gains at the moment of the merger - comparing your cost
basis to the value of stock + cash received. If your unrealized capital
gain is at least as much as the cash received, then the entire cash
payment is taxable. If it's lower, you're only taxed to the extent of
your gains. If you have a loss...well forget that, that's pretty
unlikely given the merger price.

For specifics on this you'll need to see the final documents provided by
FD/MAY after the merger - usually companies mail them and post them to
the Investor Relations part of their web site.

Ways to avoid that forced tax bill?...not many really...

You can of course sell shares before then. That would speed up the tax
hit which you probably don't want to do. Sometimes this is helpful when
a merger is going to be completed "next year" and you want to shift
taxes into "this year." Probably not an issue with FD-MAY, isn't it
going to be done before year end?

Other than that you'd need to give the shares away to avoid the tax
bill. This isn't so far-fetched but of course depends on your plans for
charitable giving & gifts. A client of mine gave away shares that were
about to be all-cash-mergered into a big tax bill. They planned to give
a lump sum of cash anyway, and I suggested they do this instead. They
got a charitable deduction for the full value of the shares, and because
the charity sold off the shares, nobody paid tax on the gains. It's a
nice way of increasing the amount you can give to a charity. Most
charities are set up to receive this kind of donation, even many local
churches.

You can also give the shares away. When you gift stock you give away
your cost basis (and any resulting tax bill) as well. This might make
sense if, for example, there was a young relative who is in the 0% tax
bracket, who you planned to give money to anyway - say, to help with
college tuition or something like that. Instead of a $5,000 check you
give $5,000 in MAY, and they sell the shares and get the tax bill - but
being in the 0% bracket there's no tax.

Many variations on the above but the bottom line is, if you have gains
in your MAY stock right now, you're going to have some taxes at the time
you receive cash.

-Tad

PS (this is a repost, just thought of something else) - as with any gain
you can offset it by realizing capital losses on other investments