How do I report a spinoff distribution on shares I received which have no assigned value?

[Muse9876]

I was recently involved involved in a spinoff taxable event at the end of Dec 2022. It involved META preferred shares that received 1:1 stock in a spinoff company Next Bridge. The preferred shares (ticker was deleted) due to corporate action and the new common shares I received in the Spinoff are private and have no value assigned at this time. This share exchange from the spinoff will not show up my 2022 1099 per my broker because the private shares have no value, and I did not sell any of my preferred shares prior to the spinoff,  but yet the spinoff itself is a reportable event for my 2022 taxes.  How and where would I report this as a share exchange on my taxes?  Where am I supposed to come up with a fair market value of these private shares?

I reached out to the META the parent company who spunoff the new company Next Bridge for any addition information regarding tax and this was their reply:

META INTENDS TO COMPUTE A VALUATION FOR THE COMMON STOCK DISTRIBUTED IN THE SPIN-OFF. TO DO SO WILL REQUIRE META TO COMPUTE ITS EARNINGS AND PROFITS FOR 2022 FOR TAX PURPOSES. THIS WORK, AS INDICATED IN PAGE 31 OF THE PROSPECTUS IS LIKELY TO REQUIRE UNTIL AFTER U.S. HOLDERS FILE THEIR U.S. TAX RETURNS. META STRONGLY RECOMMENDS THAT ALL RECIPIENTS OF THE NEXTBRIDGE COMMON STOCK SEEK ADVICE FROM THEIR TAX ADVISORS WITH REGARD TO ESTIMATING THE VALUE OF THE COMMON STOCK RECEIVED IN THE SPIN-OFF SINCE, AS STATED ON PAGE 30 OF THE PROSPECTUS, ANY VALUE ASCRIBED BY META IS NOT BINDING ON ANY TAX AUTHORITY.

THE WORK REQUIRED TO ASCRIBE A VALUE TO THE COMMON STOCK IS COMPLEX AND TIME CONSUMING. IT IS UNCLEAR WHEN THIS WORK WILL BE COMPLETED BY META AND ITS OUTSIDE ADVISORS. META NEEDS THESE DATA BY THE EXTENDED DUE DATE FOR ITS US TAX RETURNS WHICH OCCURS IN SEPTEMBER 2023. IT IS STRONGLY ADVISED THAT RECIPIENTS OF THE COMMON STOCK SEEK GUIDANCE FROM THEIR TAX ADVISORS WITH RESPECT TO THE APPROVAL TREATMENT OF THE DISTRIBUTION.

The link to their prospectus- tax info starts on bottom of Pg.30 

https://www.sec.gov/Archives/edgar/data/1936756/000119312522292114/d302576d424b4.htm 

Any assistance on how to handle is appreciated!!

Thank you

[ErnieS0]

File an extension to be safe. If you ignore the distribution or enter an incorrect value you will have to amend your return.

Meta Materials says, “This work, as indicated in page 31 of the prospectus is likely to require until after U.S. holders file their U.S. tax returns.

Preferred shareholders may have a taxable event. Meta says it will value the common shares but “this valuation is not binding on the IRS or any other taxing authority.”

“These taxing authorities could ascribe a higher valuation to the distributed Common Stock, particularly if, following the Spin-Off, those shares of Common Stock trade at prices significantly above the value ascribed to those shares by Meta.”

“Such a higher valuation may affect the Spin-Off distribution amount and thus the U.S. federal income tax consequences of the Spin-Off to Meta’s Series A Preferred stockholders.”

[Muse9876]

Hi, thanks for your reply. I understand your reply, but the information given to us is conflicting.

The answer I received directly from META pertaining this stated the the ascribed value of the shares that META comes up with is not binding to any tax authority (this is stated on the S1 as well) meaning their value could be higher or lower then what the IRS deems or can differ from what  shareholders think the stock is worth on “estimating the fair market value”. 

Page.  32

Gain or Loss on the Spin-Off Treated as a Sale or Exchange of Series A Preferred Stock

“If the Spin-Off qualifies as a sale of Series A Preferred Stock, such U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between (i) the fair market value of our Common Stock received by such U.S. holder in the Spin-Off and (ii) such U.S. holder’s adjusted tax basis in the Series A Preferred Stock surrendered in the Spin-Off.

Any such capital gain or loss generally will be long-term capital gain or loss if a U.S. holder’s holding period for the Series A Preferred Stock so disposed of exceeds one (1) year. Long-term capital gains recognized by non-corporate U.S. holders generally will be eligible for taxation at reduced rates. The deductibility of capital losses is subject to limitations.“

[ErnieS0]

There are two classes of Meta Materials stock — common and preferred. From the Securities and Exchange Commission link you provided, Meta will value the common shares at a certain price, which the IRS may or may accept.

Holders of preferred shares will report the difference between the value of the common shares they receive in exchange for surrendering their preferred shares.

For example, if Meta says you receive common shares worth $100 in exchange for preferred shares that have a cost of $100, there is no gain or loss. If the IRS says, “No that’s wrong, the common shares are worth $150,” then you have a $50 gain ($150 - $100).

[Muse9876]

Hi. Thank you for that information Now  I am really confused - 

The MMTLP (preferred shares)  were exchanged for the common shares in the new company. MMTLP no longer exists. I have my new common shares (which is now in the new spinoff company, no longer META) showing  assigned value of $0 (no ticker yet assigned to common shares as these are currently private shares) in my broker accounts with x amount of shares (currently, it shows my cost basis for MMTLP transferred over into the common stock- which my broker said should be adjusted once the stock is assigned a value). 
So wouldn’t it be my  cost basis from MMTLP, let’s say mine was $2.00 (cost basis) that is then used against whatever value the common shares are given? Or are you saying it’s an even share exchange unless the IRS comes back with a different value? 

Also, would this be reported the same way as a sale of stock or is there another tax form that this spinoff exchange/ distribution would be reported on? 

Thank you! 

[Muse9876]

Ooops,  I read your reply wrong. So sorry. Please disregard my first part of reply,  I see where you mentioned cost of preferred shares and I understand that part lol, but can you please answer my last question regarding the tax form to use?

Adding a question, does filing an extension prevent for efile later? I have never done an extension before. 

Thank you! 

[PattiF]

This would be reported the same way as a sale of stock. Your information would be entered the same way as the information on a 1099-B.

To enter the spinoff without a 1099-B follow these instructions:

•  Click on Income & Investments
• Scroll to Investments and Savings and click on Start (or Edit or Review)
• Click on Add Investments. And then Continue on the next page
•  Choose to Enter a different way
• Pick Stocks, Bonds, Mutual Funds and Continue
• Which bank or brokerage sent you a 1099-B for these sales?, Enter name of brokerage, and Continue
• Answer questions on next page and Continue
• Now, Choose how to enter your sales, One by one, Continue
• Continue past the page Look for your sales on your 1099-B
• You can enter your sales on the next page.
• In the first box, Sales section, Choose Short-term (or long-term) did not receive 1099-B form

Continue with the information for your sales

You can still e-file with an extension as long as you file by the last day of the extension period which is October 15.

@Muse9876 

[Muse9876]

Hi Patti. Thank you for reaching back! I need more assistance please, if you don’t mind. 

The company’s  prospectus mentioned a form1099-DIV.

You mentioned a form 1099-B? If you don’t mind,  clarify what that form is and how it differs from a 1099-DIV. 

Here is the link company’s prospectus - tax info starts on page 29. To be honest I am not sure if this is even a taxable event or what would qualify this spinoff as taxable. Maybe if you have some spare time  you can look over and bring me more clarity if this will be a taxable event- and where exactly does it show this in the filing as a tale tale sign?

https://www.sec.gov/Archives/edgar/data/19367[phone number removed]22292114/d302576d424b4.htm

Any and all help is greatly appreciated! 

[DaveF1006]

The taxable status of a spinoff is governed by Internal Revenue Code (IRC) Section 355. The majority of spinoffs are tax-free, meeting the Section 355 requirements for tax exemption are met.

The main difference between a tax-free spinoff and a taxable spinoff is that a taxable spinoff results if the spinoff is done by means of an outright sale of the subsidiary company or division of the parent company.  There are other elements of IRC Section 355 such as control, device, active trade or business, and distribution that determine if it tax free or not per IRS section 355.

1. Control requirements stipulate that the corporations must own stock possessing at least 80% of the total combined voting power of all classes of the stock of that corporation. There are different measures for determining voting control but are usually determined by the ability to elect directors.
2. Device requirements for tax-free spinoffs mean the spinoff cannot be used as a device for the sole purpose of distributions of earnings and profits. This is determined on a case-by-case basis and considers all aspects of the spinoff.
3. The active trade section requires both the pre-existing company and the newly spun-off company to qualify as what the IRS calls an "active trade or business" immediately once the deal is finalized. This also requires that both businesses are actively engaged in business.
4. The distribution requirements mean that the IRS requires the pre-existing company to distribute all stocks and securities held in the newly spun-off company in specific ways. Usually, this is for the company to distribute at least 80% of the shares to existing shareholders on a pro-rata basis. The second involves the stock options given to shareholders explained above, where they can choose either the pre-existing company or the new company to invest in.

Without knowing the specific nature of the spinoff, it is difficult to tell if your spin off is a taxable event or not. The answer may lie within your prospectus. 

The difference between a 1099B and 1099 DIV is that 1099 B reports the sale or distributions of stocks, bonds, and other investments.  1099 DIV report the distribution of dividends. 

If you are really unsure if this should be reported or not, I would seek advice from a CPA. Hopefully i have given you some information to think about but we cannot comment on the specific nature of your event. We can only speculate based on Internal Revenue Code (IRC) Section 355 and how it may apply to you.

@Muse9876 

[Muse9876]

Thank you!
 This is a bit confusing. The parent company has until Sept 2023 to do their taxes so shareholders won’t be receiving forms regarding this spinoff from our broker for a long while. I really don’t want to do an extension and would like to be able to manually enter this info if I can to get my taxes filed. 

Here is a breakdown- 

These were preferred non voting shares of oil and gas assets. For the spinoff, 100% of the outstanding preferred shares (under parent company)  spun off into the new company as common shares 1:1. Shareholders from the spinoff now own zero shares of the parent company. 

“This prospectus (“Prospectus”) is being furnished to you as a Series A Preferred stockholder of Meta Materials, Inc. (“Meta”) in connection with the planned distribution (the “Spin-Off”or the “Distribution”) by Meta to its Series A Preferred stockholders of 165,472,241 shares of common stock, par value $0.0001 per share (the “Common Stock”), of Next Bridge Hydrocarbons, Inc. (the “Company,” “Next Bridge,” “we,” “us” or “our”) held by Meta immediately prior to the Spin-Off. As of the date hereof, Meta holds 165,523,363 shares of Common Stock, of which 165,472,241 shares will be distributed in the Spin-Off and will be 100% of the outstanding shares of capital stock of the Company following cancellation of 51,122 shares of Common Stock contemporaneously with the Distribution.”

In order to meet the “substantially disproportionate” test, the percentage of outstanding shares of Meta voting stock actually and constructively owned by a U.S. holder immediately following the Spin-Off must, among other requirements, be less than 80% of the percentage of the outstanding shares of Meta voting stock actually and constructively owned by such U.S. holder immediately before the Spin-Off. Because the Class A Preferred Stock is not voting stock, it is not expected that the “substantially disproportionate” test will be satisfied in respect of the Spin-Off.”

So it does not look like it meets the requirements of section 355 as non taxable. So what am I looking for to see if this should be reported as a sale or distribution?

https://www.sec.gov/Archives/edgar/data/19367[phone number removed]22292114/d302576d424b4.htm

[Muse9876]

If this link below doesn’t work, please see link in my original post.

[removed link]

[Muse9876]

[Removed]

[Muse9876]

The link to their prospectus- tax info starts on bottom of Pg.30 

 [link removed]

[GeorgeM777]

As a follow-up to all of the prior posts, it does not appear that you are in a position to include the common stock, received by you in connection with a META Materials spin-off, on your return.  As you mention in your post, you are unable at this time to assign any value to the shares you received (assuming this is a taxable event and requires you to report such on your 2022 tax return).  Thus, if you file your return before you receive the information from META Materials, you may have to amend your return.  If you decide to wait, then as suggested by @ErnieS0, you may want to file an extension.   

@Muse9876 

[Muse9876]

Thank you!!