A tale of Stock Mergers and Schedule D

This year’s tax return has been anything but EZ. I do not have a mortgage, but because I have capital gains, I routinely must complete forms 1040 and Schedule D to report those gains or losses :(

Capital gains are typically reported to the IRS by your fund manager or broker. So, the IRS knows what you received in the sale of these securities, but they are clueless concerning the purchase price. You must furnish the cost basis, or what you paid to purchase the stock. This is very important information, because it will determine whether you have a gain or a loss and the amount of your tax bill.

Most of the mutual fund companies will track your basis for you. This is a big help, given the multitude of purchases that can occur when one uses dollar cost averaging. As for individual stocks, you are on your own. I record all of my transactions by date, shares, dollar amount and any fees in an Excel spreadsheet. I also keep the statements for the transactions from my broker. If, for some reason, I still can not find the data, I resort to Yahoo! Finance for historical data.

For the most part, completing schedule D is straightforward, but this year, I have been thrown a new twist. Two of the stocks that I have owned for several years, were bought out by other companies. The mergers resulted in new shares, a cash payout and cash in lieu of shares. Hmmm. How do I report all of that on schedule D?

I use tax software, but I still need to calculate the basis for all this stuff. It sure would have been nice if Turbo tax could have asked about the parameters of the sale and then ran the calculations. I was surprised the software did not have the capability, after all stock takeovers and mergers are rather common events.

Instead, I fired up Google and started searching for some help. Based on information that I found here at Fairmark.com, I have worked through one of the stock mergers and it’s tax consequences.

Stock Merger #1
Kinross Gold Corp (KGC) acquired Bema Gold (BGO) in the last quarter of 2007.

KGC merges with BGO providing 0.4447 shares of KGC for every share of BGO, as well as $0.01 Cdn (0.00849 US$) in cash for each share. The price of KGC at the time of the merger is $12.01/share.

I have 1000 shares of BGO at a cost basis of $1464.

After the merger, I have 0.4447*1000 = 444.77 shares of KGC @ $12.01/share and $0.00849*1000 cash.

The total deal = 444.77*12.01 + 0.00849*1000 = $5350.18

Now, let's calculate the gain.
Gain = total deal – basis = $5350.18 – $1464 = $3886.18

The IRS requests that I report the lesser of the cash received or the gain. Obviously, the cash received is much less at $8.49.

Now to calculate my new basis.
New Basis = Old Basis + gain reported – cash received = $1464 + $8.49 -$8.49 = $1464

And finally, since companies do not like fractional shares, the 0.77 shares will be given to me in cash. This is referred to as cash in lieu and must be reported to the IRS.

The cash amount is: 0.77 shares * $12.01 = $9.25

Using my old cost basis, I calculate my cost per share.
$1464/ 444.77 = $3.292/ share

My cost for the 0.77 share is $3.292*0.77 = $2.53

And the gain to be reported is $9.25 -$2.53 = $6.72

All of that number crunching to arrive at a total of $15.21 in gains. Fortunately, this isn't going to impact my tax bill much, but what a pain! And I still have one other stock merger to go…

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