Figuring cost basis after a merger


Q. I have a question about what to report for capital gains on the merger of British American Tobacco (BAT) with Reynolds American (RJR). Can you take the cash you receive ($29.44 per share) and subtract the basis per share of RJR and pay that amount as capital gains, and reduce the basis of BAT? I realize you would pay capital gains on the BAT stock when you sell it.
— Taxpayer

A. Mergers can make tax reporting a little complicated.

This particular merger transaction effectively resulted in a disposal of the Reynolds American, Inc. (RAI) shares, which is a taxable transaction, said Lauren Mazzella Landolfi, a certified public accountant with Wilkin & Guttenplan in East Brunswick.

“The cost basis of the shares will include the original purchase prices plus any reinvested dividends,” she said. “Depending on when you acquired the stock, there may have been stock splits that need to be considered as well.”

When a stock split occurs, the total shares increase and the cost basis per share is diluted, she said.

In this transaction, the total proceeds, which are subject to tax, equal the cash received plus the fair market value of the BAT stock received, she said.

Each RAI shareholder received $29.44 of cash and 0.526 of a BAT share per one share of RAI exchanged.

The per share value of the BAT stock received is $69.25 – the closing price of the stock immediately prior to the merger effective date, Landolfi said.

“The cost basis will be your original purchase price of the RAI stock plus any adjustments for reinvested dividends,” she said. “The total proceeds are offset by the cost basis and the result is a capital gain.”

Your basis in British American Tobacco (BAT) is the total shares of BAT you received valued at 69.25 per share, she said.

Good luck with your taxes.

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