Mechanics of a cash and stock merger

Ask NJMoneyHelp

Photo: DodgertonSkillhause/morguefile.com

Q. How do I treat something like this on my taxes? Say I buy a company’s stock for $10,000 and another company buys them out with terms of 70 percent in stock and 30 percent in cash. How do I relate the cash portion for tax purposes?
— Investor

A. It’s not that complicated.

The scenario you offered here is an example of a cash and stock merger.

When companies go through corporate actions that may impact cost basis and tax reporting, they will file a Form 8937 with the IRS, said Andy Kapyrin, director of research at RegentAtlantic in Morristown.

This form, which is made public so investors have access to it, will spell out how investors should adjust their cost basis on the new stock and what the tax consequences may be, he said.

Acquisitions like this can come in two types: taxable and non-taxable.

“If this acquisition was non-taxable, 70 percent of your original cost basis would generally flow to the acquirer’s stock,” Kapyrin said. “The other 30 percent gets realized against the cash you received.”

So, if the total cash received from this merger was $4,000, 30 percent of your original basis, or $3,000, gets applied as cost basis against those proceeds, Kapyrin said.

This makes a realized gain of $1,000.

Kapyrin said If the acquisition is considered taxable, then the full fair market value of both the cash received and the stock received in the acquisition are considered proceeds and you would potentially recognize a larger capital gain. This would reset your cost basis in the acquirer’s stock to its fair market value on the day of the acquisition.

It is possible, but uncommon, for the cash portion to be a capital gain. That’s why you should review the Form 8937 filing, he said, and rely on that and the advice of your tax professional for the appropriate way to handle this on your taxes.

Email your questions to moc.p1511336328leHye1511336328noMJN1511336328@ksA1511336328.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.