Tax on shares from Domestic and international company merger

[hugo]

For simplicity I'm using an example.

Company A is a US based company and company B is an International company.

Company A merges with Company B.

I own 1 share of company A with a cost basis of $1 and the share is worth $2 on the day of the merger.

The two companies merge, my investment firm sells my share of company A and purchases a share of company B - let's assume share's are dollar for dollar. 

I end up with 1 share of company B worth $2 and my new cost basis is $2. 

I'm told I have a taxable gain of $1 and the full amount is capital gains (long term gain) to be declare on this years income tax and this was done this way because it's a US company merging with an international company.  Is this correct?  Can you point me to the IRS publication describing this please?

In the past I have been involved in mergers of two domestic companies and my shares simply transferred from one company to the other without any tax implications instead of being forced to sell and purchase shares like this...

The stock ticker symbol even remained the same as is was for company A.

Thank you.

[TomYoung · Accepted solution]

NOTE: THE TAX ADVICE GIVEN HERE DEALS WITH THIS SPECIFIC TRANSACTION AND CANNOT GENERALLY BE APPLIED TO OTHER "CASH + STOCK" DEALS.  ANY GIVEN DEAL CAN AND USUALLY DOES HAVE INCOME TAX CONSEQUENCES DIFFERENT THAN THIS PARTICULAR DEAL.

This is very typical of "inversions" which seems to be the case here.  Your "proceeds" for your "sale" is the fair market value of the stock received.  You subtract your basis and come up with a gain or loss.  It's "as if" you got proceeds in cash equal to the market value of the "new" company stock and turned around and used that cash to by "new" company stock.

"In the past I have been involved in mergers of two domestic companies and my shares simply transferred from one company to the other without any tax implications instead of being forced to sell and purchase shares like this..."

Typically "stock for stock" deals are non taxable events but not in this case.

Somewhere along the line you got a thick proxy/prospectus/registration statement of some sort and if you look there will be a section called something like "Material United States Federal Income Tax Consequences of the Merger" or something similar and that will spell out for you how shareholders report the transaction on their income tax return.  Nobody reads these things beyond the first page or two, but you should always read that section.

Tom Young

[hugo]

Thanks Tom.

I don't think this was an inversion.  The US company merged with the international company.  Doesn't an inversion occur when the US company buys the international company?

[TomYoung]

No, it's structured the other way around.

"Corporate inversion is one of the many strategies companies employ to reduce their tax burden. One way that a company can re-incorporate abroad is by having a foreign company buy its current operations. The foreign company then owns the assets, the old corporation is dissolved, and the business – while it remains the same in its daily operations – is now effectively domiciled in a new country."

What I'd suggest to really nail this down is find that "Material United States Federal Income Tax Consequences of the Merger" section and read it.  If you don't have the material any more it certainly can be found online at sec.gov.

That is one problem with this "Company A", "Company B" approach to asking questions in here.

[hugo]

Okay thanks I will dig up the the document.  It was the merger of Fmc Technologies with Technip but I just thought it'd be easier to give a generic example.  

In any case, what choice would I have other than to have sold the shares prior to the merger?  Either way I would be dealing with capital gains proceeds that I was not planning on dealing with at this time.  I understand eventually I would have to pay tax on these gains but I'm being forced to do this now when I could have waited for later in life when I'm in a lower tax bracket and capital gains would be lower.  The part that is rather crazy is that I don't have a choice here.  

The other thing I was trying to figure out is if this is all taxable income for this year or if it can be amortized over time but it doesn't look that way.

[TomYoung]

" I just thought it'd be easier to give a generic example.  "

The trouble is, there are just no generic answers.  It's very deal-specific.

[TomYoung]

"...the receipt of Topco Shares for FMCTI Shares pursuant to the FMCTI Merger should be a taxable exchange for U.S. federal income tax purposes. Assuming such treatment, a U.S. holder generally will recognize gain or loss equal to the difference between (i) the fair market value of the Topco Shares received as consideration in the FMCTI Merger on the date of the exchange and (ii) the U.S. holder’s adjusted tax basis in the FMCTI Shares surrendered in the FMCTI Merger. "

[hugo]

I saw that now too, unfortunate.  Thanks!

[Jaysee7]

But what if their prices aren't equal? Does it just buy you less shares?

[Critter-3]

What you have is a sell and a buy.   What you buy the new stock for just becomes the basis for the new stock.  The market value of the old stock and the new stock has nothing to do with each other.