Expert: Tad Borek Date: 6/7/2008 Subject: tax on stock merging
Question Dear Sir; I desperately need your help! I forgot to file a merge in my 2006 return. In 2006 Company B (Guidant) merged into Company A (Boston Scientific). On my 1009B, Box2, $1.85 for A and $1417 for B. The IRA asked me to pay the tax on $1417+$1.85. If I report it on Schedule D, the Box(d) will be $1.85 for A and $1417 for B; the Box(e) $0 for A since this is cash paid in lieu of fractional shares. What should be put in Box(e) for B? Since the only cash I received was the $1.85 and I still own the transferred 51 shares of A, can I put $1417 and make a note "Exchange of Likekind Assets"? So the only gain will be $1.85? Please answer me ASAP, otherwise I may get penalty from IRA. Best regards!
Answer Hi Dave-
By way of background...those figures on your 1099B, the gross proceeds from sales, are reported to the IRS, and the IRS expects to see them on your Schedule D. If they don't see them, they say that you underreported income by the TOTAL 1099B amounts, without factoring in your cost basis (what you paid for them) - because the IRS doesn't know your cost basis. So your amended Schedule D will show a different amount of taxable gain or loss.
In that merger, Guidant shareholders received both cash and shares of Boston Scientific. The cash portion, which would be your $1417 figure, is a taxable sale. You need to allocate a portion of your cost basis in the original Guidant shares to that batch, and figure your gain or loss. That's one transaction to report on Schedule D.
The rest was paid in Boston Scientific shares, but part of that was some fractional shares and instead of giving you that, they give you cash. But that really is a sale of that fractional portion. Let's say it would have been 10.446 shares received...and you instead receive 10 shares, plus Cash In Lieu of the 0.446 shares. This is a taxable sale of 0.446 shares, and you need to allocate some cost basis to those 0.446 shares sold when reporting them on Schedule D. (your actual amounts are different of course, just giving an example).
So what you need to do is find the cost basis of your original Guidant shares. Then, find the instructions for allocating cost basis in the original shares of Guidant to a) the shares that were cashed out and b) the shares of BostonSci. Then, figure out what fraction of the BostonSci holding was cashed out (in my example, it would be 0.446/10.446) and allocate that cost basis to the CIL sale transaction. The remaining basis is allocated to your remaining Boston shares.
Then, amend the return to report all this on Schedule D. You may have a gain or loss, but you won't know until you allocate your Guidant cost basis.
Hope that's helpful, bounce back any follow up Q's.
-Tad
PS no, it's not a like-kind exchange, it's two sales of stock that are reportable on Schedule D
PPS you can usually find tax instructions after mergers on company web sites, in the "Investor relations" section. Because it's a couple years later you may need to do some digging but you should be able to find it -- if not, call IR at Boston Scientific and get it from them. Without that you won't know how to allocate your cost basis
