In late 2018, I bought 100 shares in Macquarie Infrastructure for $3707. This stock was a spin-off of a larger company that provided service to airports and aviation (fueling, etc). In 2020, the company decided to sell off the businesses it owned and eventually cease operation.
In January 2021, one of the businesses was sold off and a $1100 dividend was paid out. That dividend consisted of a $567 return of capital and a $532 qualified dividend. By my calculations, the basis would now be $3138. The $532 was reported on my 1099 as a qualified dividend.
In October 2021, the company sold off the largest of the assets and converted to MLP. I received $3560 in cash and 100 shares of the MLP, which continued trading using the same ticker symbol. The closing price on the day of the conversion was $3.71 a share, total of $371.
I was also issued a K-1 for October thru December 2021. There was a $179 qualified dividend reported on my K-1. My brokerage 1099 noted the $3560 distribution, but did not categorize it as a qualified dividend or return of capital.
I'm trying to understand how to treat the October conversion from a stock to MLP. I think that upon conversion to the MLP, I incurred a capital gain. The following statement is from my K-1 regarding the tax treatment.
A unitholder (including a unitholder who sold his/her units after the cash distribution record date of October 4, 2021) who received a portion of that cash is treated as having sold the majority of his/her Macquarie Infrastructure Corporation common stock contributed in the merger in exchange for the cash distributed (a “disguised sale”). Unitholders who received their units in the merger generally would have taxable gain or loss in an amount equal to the cash received less such holder’s U.S. federal income tax basis in the shares of
Macquarie Infrastructure Corporation common stock deemed to have been sold.
So neglecting qualified dividends, I see three ways to report this.
Method 1: I have a net capital gain of $420. (3560 + 567 - 3707) I have zero basis in the new MLP.
Method 2: I have a capital gain of $791 (3560 + 567 + 371 - 3707). This assumes the basis in the MLP is the value the first day of trading.
Method 3: The basis after the Jan 2021 distribution was $3140 (3707 - 567).
The total value of the transaction was $3931 (3560 cash plus stock worth $371).
I ratio'd the MLP and the cash (90.56% cash, 9.44% was the MLP).
I calculate the basis for the sale of to be .9056 x 3140 = $2843. This gives me a capital gain of $716.
The basis in the MLP is .0944 x 3140 = $296.
There are some issues with all these approaches. My brokerage shows the 100 shares of the MLP have a basis of $3140. I plan to call them tomorrow. The second is the company put out a news release right before the conversion and made the statement "the fair market vale of the MLP is estimated to be $3.25 per share", with the final determination to be made following the closing of the sale. That is where I got the $3.71, as that was the first day closing price after conversion to MLP.
I'd appreciate some feedback on which method I should use.
Thanks.
