Figuring out cost basis after Corporate Action

[rugorak]

I am hoping this is an easy question. How do I go about figuring out my cost basis for a stock that was acquired by another company and it was not a 1 for 1 exchange?

I owned shares of a bank that was acquired by another. For each share of the stock I owned I got 0.68 shares of the new bank and $2.30. I read here - http://www.investopedia.com/articles/investing/051513/know-your-stock-cost-basis.asp
that "If the number of shares are the same then the cost basis does not change, but if the number of shares change then the cost basis needs to be amended." "Companies need to file Form S-4 with the SEC, which outlines the merger agreement and helps investors determine the new cost basis." I have found the S-4 filing but it doesn't say what to do about cost basis.

Thankfully there was just 1 purchase of the original stock. So is my cost basis still the total I paid for those original shares, now just divided among fewer shares? Or is there some more complex calculation with information I am missing?

[MDM]

Assume you bought 100 shares of OLD at $15/share.  Your cost basis is $1500.

Now you received 68 shares of NEW, plus $230.

Your cost basis in NEW depends on how the $230 is being treated by the SEC and IRS.  One might guess it is treated as 100% income to you, so you will pay tax on that $230 and your cost basis remains $1500, but if I were you I'd check my company FAQ for the transaction....

[rugorak]

Ok. Thanks. I emailed investor relations asking if they can tell me or point me in the right direction. The hard part is this was bought for me ages ago. The original shares were from the small home town bank. Then it was bought out by bigger regional but thankfully that was a 1 for 1. And then for my own ease I moved it to Vanguard but of course they don't have my cost basis since I didn't buy it through them.

[Spork]

FWIW:  Almost every time this has happened to me, it was treated differently.  Usually there is some release (often it comes with very helpful working example of "Jill has 100 shares...") 

Investor relations will probably dig that document up and point you in the right direction.  Often googling specifics of the acquisition will find the document.

[rugorak]

From Investor services;

"Our Corporate Tax department is currently in the process of filing Form 8937, which will include information to assist in your calculations for tax purposes."

So in another few weeks I should have my answer. Thanks for the feedback. It at least helped me get pointed in the right direction.

[rugorak]

So they finally released the forms. But I am still confused.

http://investor.key.com/IRW/CustomPage/100334/Index?KeyGenPage=328713
http://investor.key.com/Doc/Index?did=34679668

Since it probably isn't a huge deal and hopefully it will make things easier I owned 25 shares of FNFG and now own 17 shares of KEY. I originally was gifted the 25 shares at $10 per share. Based on the example I come up with the following:

Total Merger Consideration - $256.40 (FMV of 17 at $11.70 is 198.90 + $57.50 received in cash consideration)
Realized Gain - $6.40
Recognized Gain - $6.40 (lesser of realized gain or cash consideration)

Tax basis per share of KeyCorp common stock received - ($250 / 17) = 14.70588235294118 = $14.71

So did I figure all of this correctly? I have a capital gain of $6.40 from the corporate action. It doesn't make sense to me. Mainly my new tax basis per share. Or am I supposed to do ($250-$57.50)/17 = 11.32352941176471 = $11.32 per share?

Any help is appreciated. Thankfully after I figure all this out I am going to try and keep everything bought through Vanguard so they have to keep track of this stuff for me.

[triangle]

I found the write up a little confusing as well. Usually the old cost basis is carried over and you would pay short term capital gains on the cash received, but it does not look like this merger was structured that way. Looks like FNFG stock had been relatively flat so maybe that was done to help out existing shareholders, but hard to speculate.

(Don't take my word on any of this...) when I feed your numbers into the example given by the URL you provided I came up with results similar to yours:

• 25 FNFG x $10.00 = $250 old basis total
• 25 FNFG * 0.68 shares in exchange = 17 new shares of KEY
• 17 KeyCorp * $11.70 new basis/share = $198.90 new basis total
• Cash received = 25 * $2.30 = $57.50
• Total Merger Consideration = Cash + new basis = $256.40
• Your realized gain = 256.40 - 250 = $6.40

But that your new basis post merger would be lower at $198.90 to reflex market value at time of merger. Again that looks like an unusual way to treat the taxes related to the merger. It is like are getting an advanced cash payout which reduced your cost basis, but you will not have to pay any capital gains on that until you decide to sell KeyCorp.

EDIT - my comment about new basis above cannot be correct. Does not make sense, I think the whole calculation about gain must be wrong.

[MDM]

So they finally released the forms. But I am still confused.

At least you don't have to deal with any fractional shares. :)

Total Merger Consideration - $256.40 (FMV of 17 at $11.70 is 198.90 + $57.50 received in cash consideration)
Realized Gain - $6.40
Recognized Gain - $6.40 (lesser of realized gain or cash consideration)

That looks correct, with the pertinent clauses:

...recognize gain equal to the lesser of,
 (1) the amount by which the sum of the fair market value of the KeyCorp common stock and
cash received by a holder of First Niagara common stock exceeds such holder’s tax basis in its
First Niagara common stock, or
(2) the amount of cash received by such holder of First Niagara common stock ($2.30 per share). 

Tax basis per share of KeyCorp common stock received - ($250 / 17) = 14.70588235294118 = $14.71
So did I figure all of this correctly? I have a capital gain of $6.40 from the corporate action. It doesn't make sense to me. Mainly my new tax basis per share. Or am I supposed to do ($250-$57.50)/17 = 11.32352941176471 = $11.32 per share?

Here it appears the pertinent clauses - with some words removed - are

The tax basis of KeyCorp stock will be the same as
the tax basis of the First Niagara stock,
decreased by the cash received,
and increased by the amount of gain.

Based on that, your KeyCorp basis would be
($250 - $57.50 + $6.40)/17 =  $198.90 / 17 = $11.70/share

Same as what triangle got, even if triangle doesn't believe it.... ;)

[rugorak]

Thanks for both of the replies. That makes sense to me. I thought I was missing something. Obviously I'll double check everything when actually doing my taxes but at least now I can go in educated enough to have a pretty good idea of what is what instead of being clueless.

[triangle]

The issue which caused my disbelief was getting cash back but not directly paying taxes on that portion immediately this year. Being able to turn that cash compensation which would usually be taxed as a short term gain and essentially turning it into a future capital gain which if held long enough be taxed at long term rates. But that must be due to how the deal was structured as it was also odd that the value of the new stock position is less than it was pre-merger. 

Maybe @MDM or others can offer a second opinion, but for all this to make sense I believe your new tax basis remains what you originally paid for the stock: $250. Meaning that you could sell today for a capital loss. That was the treatment shown in tax example from KeyCorp, though it also highlighted the small reduction in original basis if forced to sell a fractional share. 

To summarize you have a very small gain of $6.40, but your original tax basis did not change.

[MDM]

...I believe your new tax basis remains what you originally paid for the stock: $250.

That's not an unreasonable belief, but it does seem to differ from the documentation.  It's not an exact quote, so it's possible the meaning has been altered, but stripped of much legalese it seems we have:

The tax basis of KeyCorp stock will be the same as
the tax basis of the First Niagara stock,
decreased by the cash received,
and increased by the amount of gain.

I'd be interested if anyone has an alternate synopsis that leads to a different conclusion.

[triangle]

I believe the key calculation is around the statement "and increased by the amount of gain".  In the example worksheet they gave a calculation of "$3,000.00 - $1,626.10 + $1,626.10 = $3.000".  Adding then subtracting the cash gain results in 0, so I don't know why they did that other than to show the full math or just confuse everyone. ;-)

[MDM]

I believe the key calculation is around the statement "and increased by the amount of gain".  In the example worksheet they gave a calculation of "$3,000.00 - $1,626.10 + $1,626.10 = $3.000".  Adding then subtracting the cash gain results in 0, so I don't know why they did that other than to show the full math or just confuse everyone. ;-)

Perhaps because the gain doesn't always equal the cash received?  E.g.,

...recognize gain equal to the lesser of,
 (1) the amount by which the sum of the fair market value of the KeyCorp common stock and
cash received by a holder of First Niagara common stock exceeds such holder’s tax basis in its
First Niagara common stock, or
(2) the amount of cash received by such holder of First Niagara common stock ($2.30 per share). 

[triangle]

Maybe I was/am thinking too hard about this. My original doubt was about how to adjust the cost basis and its corresponding relationship to the cash received. The tax impact worksheet only presented a single example, where the person has low cost basis in FNFG, one less than ($11.70 * 0.68)/share so that after the stock exchange their new KEY shares have a total value greater than the original FNFG purchase. In that case the total "realized gain" is larger than the cash received, so it is logical for the person to only be responsible for paying taxes on the actual cash received, leaving the remainder of this "realized gain" as unrealized, to be captured as a future capital gain whenever the KEY shares are sold. Meaning that the original FNFG cost basis would remain in place undisturbed by the merger.

In the example given in our thread here, the new KEY stock allotment has a lower basis than the original FNFG creating a capital loss, though a loss which is less that the cash payout. This situation was not highlighted completely in the tax impact worksheet. It would have been more clear (to me at least) if the worksheet had described this more like if your new basis < old basis then subtract that capital loss from your cash payout to determine your taxable income. A case where the merger is creating both a small capital loss and positive income at the same time.

....Meaning I agree with the analysis of a $6.40 gain and a $198.90 new basis for Mustachian @rugorak. (Ignoring effects of brokerage fees in all of this discussion).

A third situation occurs if one originally paid more than ("11.70 * .68) + 2.30" or $10.256 per share. In which case the "realized gain" would be negative. So no taxes on the cash payout, but seems like one would be able to adjust their new KEY basis above $11.70/share to reflect that some of their capital loss has not been realized yet. This case was not highlighted at all.

[rugorak]

....Meaning I agree with the analysis of a $6.40 gain and a $198.90 new basis for Mustachian @rugorak. (Ignoring effects of brokerage fees in all of this discussion).

Assuming I sell all my shares at once (which for such a small amount and the complexity involved is what I would do) it should just be a flat $7 fee from Vanguard as far as that goes.

Any suggestions on how to make sure I do what is correct for all of this? Should I just hire a professional to review my taxes or call the IRS? Or something else? I appreciate all the advice and thankfully for a relatively small amount this shouldn't be a huge deal even if we are all mistaken.

[MDM]

Any suggestions on how to make sure I do what is correct for all of this?

Well, you have a couple of anonymous internet posters agreeing on the $6.40 gain and a $198.90 new basis - what more could you want? ;)

Should I just hire a professional to review my taxes or call the IRS? Or something else? I appreciate all the advice and thankfully for a relatively small amount this shouldn't be a huge deal even if we are all mistaken.

It is indeed a relatively small amount and you have advice from the merger you are following in good faith.  If it were me I would go with what you have, and not bother paying a professional fee that will likely be more than the value of these transactions.

[triangle]

Agreed with @MDM. Unless @rugorak is committed to this investment and wanted to buy more, I would sell at this near break even price and avoid ongoing record keeping. A $7 brokerage fee would be subtracted from the small gain (looks like $17 or $1/share if it had been sold today Oct 12) at tax filing time so there would be very little taxable income generated from all this activity.  Certainly not enough gain to be worth the time we are spending to analyze. ;-)