Have to calculate basis with an incomplete 1099-B for a merger

[Paul28]

      I intend for a Turbotax Live expert to complete my return but the phone line recently told me they would not calculate my basis for me.  Unfortunately, this is my major problem.  Added to this, I am a tax accounting noob.  I invested $25,000 into a convertible note with private company A about two years ago.  In December 2021, A merged with public company B.  The merger terms stated that A shareholders would receive half cash which was $10.89 and half stock which was 0.39673 shares of B (at $27.4432/share) for each share of A.  I would also receive additional cash and B shares as A's products improve and contribute to B's bottom line.  This means that my current situation will probably recur.

     I received a 1099-B that listed in box 1D the proceeds of $35,794.95, box 2 "type gain or loss undetermined,"  box 5 "this is a noncovered security," box 6 "reported to IRS: gross proceeds," box 12 "basis not reported to IRS."  I contacted the issuer and they would not give me any more information.  I received a statement from Computershare saying I had received 1,338 shares of B.  My note had converted to A shares instantly at the merger and then swapped for B shares and cash so I had not received any A shares.  However, working backwards from the 1,338 B shares, I calculated that my note converted to 3372.57077 shares of A.  I don't know how I should round off the decimals. 

     I also received a Form 8937.  Someone I talked to advised me that I would not owe taxes on the B shares until I sold them.  The Form 8937 said that the holder of one share of A would recognize income equal to the lesser of a) $21.78 minus my basis in that A share and b) $10.89.  It also said that my basis in the 0.39673 B shares received would equal my basis in one share of A minus $10.89.  I don't know how to calculate the basis or what the Turbo expert will want to know.  I filed for an extension and paid what I would owe if the entire proceeds were taxed at the long-term capital gains rate.  I hoped that would be sufficient.  Any help here on calculating the basis and what I might owe in taxes on this? What will be my basis on cash and B shares if I receive more in the future? Thank you!    

[Mike9241 · Accepted solution]

some things do not make sense. 

Assuming you are correct that you had 3,372 A shares then your tax basis in each A share would be the $25,000 you paid for the convertible note divided by the 3,372 equivalent A shares or about $7.41 per share. Per the 8937 income is the lesser of a) $21.78 minus the basis in one A share ( $7.41 ) = $14.37 or b) $10.89. thus your income would be $10.89 times the 3,372 or about $36,721. this is more than the $35,795  on the 1099-B. I would think the 1099-B represented the actual net cash you received - don't know if any fees or charges were taken out. 

then the basis in each .39673B share is the tax basis in one A share of $7.41 less $10.89 this is a negative figure and therefore not possible.

for one A share cash of $10.89 + 0.39673 shares of B (at $27.4432/share) this probably was only an estimate if it was issued before the exchange was complete. If I'm right that those were estimates, then the number of shares would change on the effective date so you got $10.89 worth of shares.  

you may want to check B's investor relations website. there may be more info there or call.

I would think, which means I'm not sure, that the boot (cash) would be fully taxable (no cost basis) and the B shares now have the $25,000 tax basis of the note.   future stock received would not be taxable  - just more shares to split the tax basis over. any additional payments for the exchange would be capital gain. dividends would be taxable to the extent B has earnings and profits. you would be notified if any portion was not taxable. 

[Rick19744]

A couple of comments:

• I agree that with the information provided, we can't provide too much more assistance.  
• Calling Investor Relations, while an option, experience tells me they won't be able to be much help
• TT Live will want you to provide the sales price AND cost basis.  They won't provide help in determining the cost basis
• Since no company names were provided, I would recommend doing a Google search - Public Company XYZ merger with Company ZYX (of course using the actual names).  There may be better information available in helping you determine the cost basis in the Public shares and gain on the cash received.  @Mike9241 gave you a starting point which may help when reviewing other details on the merger.  Since the company was public, there will most likely be something out there to help.