How to report a merger/buyout of ARRIS acquiring UK-based Pace Plc where I received £1.325 of cash (~USD $2.00) and 0.1455 ARRIS shares for each Pace share?

[cah178]

The merger/buyout completed on Jan 4th, 2016. I owned multiple lots of Pace ESPP and RSU shares which were acquired at different times. The ESPP shares are held in a US-based brokerage account which should issue a 1099-B by mid-February. The RSU shares are being held in a UK brokerage account which does not issue a 1099-B statement or any US-taxed-based forms. There were also some Pace reinvestment dividend shares in the UK brokerage account.

[TomYoung · Accepted solution]

This is a much easier sale of stock than is typical with so many of the "cash plus stock" transactions commonly seen as you simply use as "proceeds" for the sale the sum of the cash plus the fair market value of the stock received, and recognize gain or loss "as if" you sold your stock in an all cash deal.  The basis of the New ARRIS shares is the same as the fair market value.

This is the recommended US income tax treatment disclosed in the document "Recommended Combination
OF PACE PLC AND ARRIS GROUP, INC. to be effected by means of a Scheme of Arrangement under Part 26 of the Companies Act 2006"

(The Brits have a less pejorative notion of the word "scheme" than most Americans do. 

Also the use of the word "cannot" in the 1st sentence of 4.2 below - "a loss realized on the exchange of one block of Pace Shares cannot be used to offset a gain realized on the exchange of another block of Pace Shares"  - would seem to be a typo given that both 4.1 and 5. clearly contemplate that gain and loss can be recognized.  )

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4. Material U.S. Federal Income Tax Considerations of the Scheme of Arrangement to U.S. Holders
4.1 A U.S. holder of Pace Shares that exchanges such Pace Shares for New ARRIS Shares and cash
pursuant to the Scheme of Arrangement generally will be required to recognize gain or loss equal to
the difference, if any, between (i) the sum of the cash and the fair market value of the New ARRIS
Shares received by such U.S. holder in the Scheme of Arrangement and (ii) such U.S. holder’s
adjusted tax basis in the Pace Shares exchanged therefor. Any gain or loss so recognized would
generally be treated as described below in “–Treatment of Gain or Loss Recognized”. A U.S. holder
would have an aggregate tax basis in any New ARRIS Shares received in the Scheme of Arrangement
that is equal to the fair market value of such New ARRIS Shares as of the effective date of the Scheme
of Arrangement, and the holding period of such New ARRIS Shares would begin on the date after the
Scheme of Arrangement.

4.2 If a U.S. holder acquired Pace Shares at different times or at different prices, any gain or loss will be
determined separately with respect to each block of Pace Shares, and a loss realized on the exchange
of one block of Pace Shares cannot be used to offset a gain realized on the exchange of another block
of Pace Shares. Any such holder should consult its tax advisor regarding the manner in which cash
and New ARRIS Shares received pursuant to the Scheme of Arrangement should be allocated among
different blocks of Pace Shares and with respect to identifying the bases or holding periods of
particular New ARRIS Shares received pursuant to the Scheme of Arrangement. The U.S. dollar
amount of the cash received in currency other than in U.S. dollars is determined by reference to the
spot exchange rate in effect on the date of the sale or exchange or, if the Pace Shares sold or exchanged
are traded on an established securities market and the U.S. Holder is a cash basis taxpayer or an
electing accrual basis taxpayer, the spot exchange rate in effect on the settlement date.


5. Treatment of Gain or Loss Recognized
Any gain or loss recognized by a U.S. holder on the exchange of such holder’s Pace Shares pursuant to the
Scheme of Arrangement should be treated as gain or loss from the sale or exchange of such Pace Shares. Any
such gain or loss generally should be treated as capital gain or loss and will constitute long-term capital gain
or loss if such U.S. holder has held its Pace Shares for more than one year as of the effective date of the
Scheme of Arrangement. Long-term capital gains of certain non?corporate U.S. holders (including
individuals) will be subject to U.S. federal income tax at preferential rates. The deductibility of capital losses
is subject to limitations. Any gain or loss recognized by a U.S. holder on the transfer of Pace Shares will
generally be treated as U.S. source gain or loss.

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As far as I can tell ARRIS has issued no Form 8937 providing guidance here for former PACE shareholders.  The trading range of ARRIS on Jan 4, 2016 looks like:

Jan 04, 2017

Open    $30.08
High     $30.72
Low      $29.82
Close   $30.40

and you are free to come up with any per share "fair market value" you feel you can defend with the IRS and there is no cookbook formula here.  Commonly, companies use the average of the high and low or that day's closing price.

Using your ~$2.00 per share figure and the closing price of the stock on 1/4/17 the per share proceeds for each share tendered would be

$2.00 + (0.1455 x $30.40) =  $6.42 per share.

Your 1099-B - if any - may very well have a "value" for the ARRIS stock received and you might as well go with that.  But having determined you price per share proceeds you should be able to simply work through the ESPP and  RSU interviews in a similar fashion to an "all cash" sale.

Tom Young

[cah178]

Thanks Tom for that info, that is helpful. Some more questions: regarding reporting the gain on RSU stocks, under the "wages and income" page of TurboTax Premier, I selected the button for "Add More Sales," I get a question about whether I got a 1099-B which I did not for the RSU and re-investment dividend shares. I selected "no" and then get a page that asks what type of investment you sold. I selected RSU option to start the interview where it asks for date sold, number of shares sold, and selling price per share. I assume I use the info on the Pace shares that were sold for this part, and when I did this, it automatically computes a Total Proceeds value for me. But I thought that the proceeds to be reported is the sum of the cash plus the fair market value of the ARRIS stock received? The taxable gain would factor in a cost basis of the RSU shares lot. I can't see anywhere where I can enter this information manually for an RSU stock. Also what is the cost basis of an RSU stock in the case of 1) RSU shares which had already vested and acquired under a traditional sell-to-cover transaction where a portion of the shares were sold to cover taxes and 2) RSU shares that fall under a "cash cancellation" scenario where RSU shares automatically vested because of the merger and the sell-to-cover used the cash portion received ($2.00 per share) instead of selling stock to cover? I thought the cost basis of an RSU stock was simply the amount I had to pay to acquire the stock which is the tax withheld (either through stock or through cash in the case of a cash cancellation scenario). Finally how does one handle the gain on a reinvestment dividend? Is this dividend handled like an RSU or other stock lot where a cost basis must be computed to determine the gain?

[TomYoung]

"I selected RSU option to start the interview where it asks for date sold, number of shares sold, and selling price per share. I assume I use the info on the Pace shares that were sold for this part, and when I did this, it automatically computes a Total Proceeds value for me. But I thought that the proceeds to be reported is the sum of the cash plus the fair market value of the ARRIS stock received?"

I absolutely WOULD NOT use the RSU step by step process here as it's just NOT NECESSARY and that RSU interview confuses many people.  You certainly should know your basis in the stock acquired via the RSU because it's very simple.  Your basis in any lot of stock acquired via an RSU - and I'm talking here about the GROSS number of shares before any shares are "withheld" or "sold" for taxes - is the SAME AS the compensation created by the vesting.

EXAMPLE
So if you had a lot of 200 shares vest, maybe only really received 150 shares after some were sold "for taxes", and the compensation reported for that vesting was $1,075.00, then your per share basis for the the remaining stock is:

    ($1,075.00 / 200)  =  $5.375 per share.

So I'd say use the "No 1099-B" interview, tell TT that you sold plain-vanilla "Stock", that you "bought" it at the vesting date and your per share cost was $5.375.

" I thought the cost basis of an RSU stock was simply the amount I had to pay to acquire the stock which is the tax withheld (either through stock or through cash in the case of a cash cancellation scenario)."

That is completely wrong.  Your "out of pocket" cost to acquire the shares was $0.  But you reported compensation and paid taxes on:
          (# of shares vesting) x (per share FMV used by employer to calculate compensation reported on W-2)

Sure, they had to sell some of those shares you received "for taxes" because "compensation" requires "withholding".  It's no different than a paycheck: your gross pay may be $1,000 - that's the figure that gets taxed - but you only receive $750 because your employer "withheld."

"Finally how does one handle the gain on a reinvestment dividend?"

A reinvested dividend is simply another "lot" of stock.  Nothing more, nothing less.  It has no "special" attributes, it's no different than a share of stock purchased through your broker.

[cah178]

Tom, thanks for the input and how to report per share cost basis for an RSU stock. Regarding the compensation used in your example, is that the same thing as the "gain" or is it the "gain" less taxes? The statement I received from my broker reports: gain, total taxes, and gain less total taxes. The gain is the GROSS number of shares that vested multiplied by the value of the stock at the time of vest. The gain less taxes subtracts out the taxes taken out (in shares since it was a sell-to-cover). So would the total cost basis for an RSU lot be calculated by taking the (gain / GROSS number of shares) X number of shares leftover after taxes?

[TomYoung]

A W-2 does not report gain, it does not report proceeds, it reports "compensation" and the compensation occurs simply because the RSU vested.  

The calculation of compensation is GROSS number of shares vesting x per share FMV at vesting date.

"Gain less total taxes" is simply your NET check, exactly like a paycheck works: Gross pay - taxes = net check.

[cah178]

Thanks for the clarification. In the case of an RSU share lot which automatically vested due to the merger which would have otherwise not vested at that time had there been no merger, how is cost basis and proceeds (the sale the sum of the cash plus the fair market value of the stock received) determined as far as tax reporting? For these shares, instead of a traditional sell-to-cover scenario where stock is sold to cover tax liabilities, the "cash consideration" of the scheme (the £1.325 of cash ~USD $2.00 per Pace share) is used to pay the taxes. This resulted in some residual cash, i.e., the leftover amount of cash after paying the tax liability. For cash received in computing the gain, would I use this residual cash amount or the full £1.325 of cash ~USD $2.00 per share for traditional sell-to-cover? Is cost-basis computed in the same way outlined above?

[TomYoung]

You'd have a situation where your basis - fair market value of the stock - and the proceeds would be exactly the same.  Then you took some of your proceeds and bought ARRIS stock.  And you used some of the cash to pay the taxes on the compensation.

[cah178]

Tom, are you saying there is no gain or loss in this situation, it would literally be 0? So in TurboTax the total cost basis would be the share price multiplied by the number of shares and the proceeds would also be exactly that value?

[TomYoung]

The RSU's vested on a day when their value was £1.325 of cash and 0.1455 ARRIS shares so that should be the compensation and the basis, and your sold then for £1.325 of cash and 0.1455 ARRIS shares.  That's exactly what happens on ANY "same day" sale.

[cah178]

But I received the residual cash as part of the merger cash settlement so I would think the total proceeds would need to add in the residual cash portion I received to reflect a small gain?

[TomYoung]

The "residual cash" was actually LESS than the cash you'd have received if the vesting of the RSU's hadn't triggered the need for withholding.  You sold for $6.42 per share (using my number) and you took $4.4232 and bought 0.1455 of an ARRIS share and then you handed some amount - let's say $1.79 - of the remaining cash and gave it to the government.  The remaining $.21 is your residual cash.