The EMC Dell merger resulted in EMC shares being converted to (a) cash $24.05 / EMC Share; (b) 0.1115 Shares of DVMT / EMC share; (c) CIL. How to input in turbotax?

Did you realize the gain this year?  Is your stock held in a broker account?

I have a followup question.  Is it possible to explain Sec 351 and redemption with an example. Say my cost basis for EMC share is $26, and did not sell the tracking stock. What will be my gain/loss? Thanks

I am a tax preparer and I am preparing a tax return for an EMC employee.  I am assuming that the cash paid for each share of EMC stock was included in the employee's W-2.  There the only basis you need to figure out is the on the shares of EMC/Dell stock received.  In my opinion, this is $49.50 per share (FMV at time of merger) X .1115  which is $5.52.  That is the basis in the stock received at the merger and the cash bonus that was received was included in their W-2 and taxes withheld accordingly.

I have a call into EMC to make sure that I am interpreting this correctly and that the cash received was already included in the employee's W-2

I have confirmed that the Merger Buyout has already been included in the employee's W-2 and taxes withheld accordingly.  If you choose to take the Merger Buyout of your stock options, it will show on your paystub as Mbo and included in your W-2.  To my knowledge, EMC should have made that very clear to employees in their W-2 packet and it doesn't appear that they did.  There is nothing on the W-2 itself showing the merger buyout portion of their total income as it is lumped into gross wages on the W-2.  You have to look at the last pay stub to realize that the merger buy out cash was already included in gross wages.

So 811southharvey, have you determined per share FMV used by EMC to calculate the W-2 amount reported?  That's what I am missing.  I do not know if it was the cash only or the full $29.31per share of cash and DVMT.  I don't know why the FMV of the DVMT shares wouldn't also be ordinary income.

"I think I have the cost basis worked out, but any insight on whether turbotax will estimate the cost basis and cost basis allocation starting from a known basis for the EMC Shares would be helpful. "

It absolutely will not.  TurboTax will accept your input as to basis either as "so many shares bought for a total of $XX" or as "so many shares bought at a per share price of $XX", and that's pretty much it.  The only exception to TurboTax actually assisting in the calculation of basis pertains to employer stock incentive programs, (RSU's ISO's, ESPP's, etc.), accessed by dropping down into the step by step interviews.

"My understanding this merger is considered almost two parts: (1) Cash to boot stock merger with cash; and (2) Merger with tender / stock issuance."

I'm not sure I understand what you've said there.  Per the Form 8937 issued by Dell they are recommending a two-part treatment of the transaction consisting of:

• a Section 351 exchange for the Dell stock received and the portion of the cash provided by Dell
  
• A redemption of EMC stock for the cash provided by EMC

Dell believes that 86.77% of each EMC Share should be treated as exchanged in the Merger for $20.17 of cash and 0.11146 shares of Class V Common Stock subject to the Section 351 treatment.

SECTION 351

Here's the general rundown of how you handle Section 351 exchanges.  TurboTax doesn't "natively" handle Section 351 exchanges so you must do all your calculations here outside of TurboTax to derive how you'll report the sale of this part of your EMC stock

1. For EACH LOT of your stock that you gave up you need to determine gain or loss based on the "proceeds" of the sale (cash per share + FMV of stock received) vs. your basis in that lot. 
   
2. Losses are NOT recognized in your tax return, they do not offset gains on "gain" lots.
3. Gains ARE recognized but only up to the LESSER of cash received or the gain as calculated per 1 above.
4. Accordingly you need to derive the basis to use against the reported cash proceeds to come to the gain - if any - you have determined.  If you have a loss clearly basis is equal to the proceeds in order to report "no loss".
   
5. For each lot your basis in the stock of the new company is: Basis in lot of old company tendered - cash received + gain recognized.
6. The holding period of the each lot tendered of the old stock carries over to the new lot received of the new stock.
7. You then attribute, proportionally, basis from each lot of the acquired company to the fractional share and and RECOGNIZE gain or loss on the CIL transaction.

Dell has recommended using $47.20 as the per share fair market value of the stock received. Under this approach, the value of 0.11146 of a share of Class V Common Stock is $5.26.

REDEMPTION

Here is Dell's statement for the "Redemption" aspect of the transaction:

"The remaining 13.23 percent of each EMC Share should be treated as redeemed by EMC in the Merger for $3.88 of cash (i.e., the Redemption). An EMC shareholder who received cash in the Redemption should generally recognize capital gain or loss equal to the difference between the amount of cash received in the Redemption and such EMC shareholder’s tax basis in the 13.23 percent of each EMC Share treated as redeemed in the Merger.

So, to make life simple by assuming you just had one lot of EMC, you'll "essentially" report the sale twice, once for the Section 351 component and once for the redemption component.  I put essentially in quotes since, mechanically, there would be nothing incorrect or wrong by figuring out your Section 351 treatment and your Redemption treatment and then simply slapping them together and reporting this as only one sale in TurboTax.  Too, you'll probably want to wait until the 1099-B for this sale is in your hands - late February most likely - since I'm sure there will be some information on that form that might be helpful.

Tom Young

Tom, thank you for this excellent breakdown on how to handle this Dell-EMC merger transaction.

I have a follow up question... if the EMC shares were originally acquired from an earlier acquisition of another company that may be eligible for qualified small business stock (QSBS) treatment per Section 1202, how would you handle the "eligible gain" component with respect to this transaction above?

In the case of the earlier merger, it was a straight stock exchange (no cash other than CIL) and treated as a tax-free reorg per Section 368 of the tax code.

I guess the bottom line is... do I calculate the Dell-EMC merger transaction per your steps above, and THEN apply the 50% gain exclusion for QSBS "eligible gain" from the earlier merger? And if so, how do I enter this in TurboTax... as it appears to be an "all or nothing" scenario when attempting to enter this via the special situations screen flow. In other words, either the entire gain for a given lot is treated as QSBS or not at all, based on my earlier tests with TurboTax Premier (desktop version)...

Any insight you can provide on this is greatly appreciated... thanks in advance!

I have only a hand-waving understanding of all the ins and outs of QSBS and it's an area of the tax law that seems to get changed regularly, so I really don't know how to answer you.  You do have a "sale" of the stock. that's clear, but the interaction with the QSBS aspect isn't.  

It would seem like the first step, though, is to do the lot by lot calculation that's needed and, I guess, if you had a gain in all the lots you could then grind that information through the regular "stock" interview until you encounter the special situations page, and that's where you'd report the basis you've derived and report your gain as allowed by the deal.  What's a mystery to me is if you're not able to report your entire gain if the new stock continues to be QSBS, or not, and to what extent.

I just don't have anything I can provide here other than speculation.  If you have enough stock to warrant it this might be the time to find a tax lawyer or CPA with extensive experience in this area - I'd think Silicon Valley is loaded with 'em - and let them guide you on this particular part of your income tax return.

So, if I had 57 shares with a cost basis of $28.36, do I split this cost basis 86.77% and 13.23%?

If that's your only lot then I can tell you that you have a "real' loss of ($442.74) on the Sec 351 portion, but since you can't take that loss you'd report a basis of $1,149.69 against the proceeds of $1,149.69 for no gain or loss, and you have a loss of ($67.36) on the Redemption portion, so you'd report a basis of $288.52 against proceeds of $221.16.  

Be sure and check these figures against your own calculations.

Thank you, I tried the formulas above but couldn't't get to your figures.  Any chance you could show me the math to these calculations?

The formula and math did not work for me either ... Excel example with some calculation would be awesome

Hi Tom,

Is the sale of proceeds of EMC shares on the section 351 portion taxable ?  If so, what cost basis can I apply against the sale of EMC shares ?

Is it 100 % , 86.77 % , or 0 % (zero) ?   

For example,  If you have a net gain on the Section 351 portion, let say 1000 shares of EMC with the cost basis of $5.65 per EMC share, do I still need pay tax on the 351 portion ?     and if so, which cost basis can I use against this sale to calculate / offset the gain ?

"Is the sale of proceeds of EMC shares on the section 351 portion taxable ?"

The GAIN on sale - Proceeds minus Basis - is taxable, yes.

"If so, what cost basis can I apply against the sale of EMC shares ? "

As I explained, you need to DERIVE a basis to use, depending on your circumstances.  You need to derive it since the gain is limited to the lesser of the cash received or your "actual" gain.  And your "actual" gain is determined by allocating 86.77% of your EMC basis to the sale.

Given your example the Sec 351 gain is the amount of cash received so you'd report a basis in this case of $0 for that calculation.  

Then you'd use the remainder of your EMC basis against the "Redemption" cash, for another gain.

You could then report two separate "trades" or add the proceeds and basis amounts together as one "sale".

Tom,

After inputing my 1099-B information into Turbo Tax, it shows income of $5202. Do I need to do any other calculations? I'm confused with the 86% Exchange and 13%  Redemption information. Thank you for your help.


9/7/2016 EMC merger with Dell. Sold 315.339 shares @ $24.05. I received $7583.90 cash and 35 shares DVMT.
9/8/2016 I bought 150 shares DVMT with cash received.
9/20/2016 I received $7.15 cash in lieu of fractional shares.

1099-B
DESCRIPTION                PROCEEDS      ACQUIRED    COST BASIS.   GAIN

Short Term Covered Tax Lot:
EMC Corp Mass Mgr.          68.96.         Various.            56.94.             12.02

Long Term Covered Tax Lot:
EMC Corp Mass Mgr.          155.65.        Various.         143.34.              12.31

Long Term Noncovered Tax Lots:
DELL Tech INC Com CL V.      7.15.          3/14/05.           6.97.               0.18
EMC Corp Mass Mgr.      7,359.30.         Various.       2181.46.         5177.84

                                                                                      Total Gain.    5202.35

@Kathleen

You really aren't allowed to use "various" when it comes to the Sec 351 computation; that requires a lot-by-lot calculation as only GAINS are allowed, not losses.  So while you do have a gain on each of the 3 "lots" you listed, you might be netting some losses in there to come to that gain.  Too, for each lot where you do have a gain you report the lesser of the cash received or the "actual" gain on that lot using the cash plus stock received as the "proceeds".  That said I've frequently advised people who have years and years of dividend reinvestments to pull together a year's worth of reinvestments as one lot, just to cut down on the work involved and under the assumption that's "close enough."

Look at your actual per share basis in the detail of your lots making up the 3 "lots" you've listed.  If any lot has a per share basis of above $29.31 you have a loss on that lot and you need to pull it out.  Any lots with per share basis between $6.07 and $29.30 will have a real gain that's less that the $20.17 per share used in the Sec 351 calculation.  Any lots with a per share basis of $6.06 or less will use the $20.17 per share as the gain figure.  

ASSUMING that the missing detail above put all the lots into that wide spread where actual gains would be reported I came up with reportable gains under the Sec 351 computation of $23.50, $40.21 and $5,889.01.  That's using the Sec 351 proceeds figure of $25.4309 per share tendered.  Of course for reporting purposes you use the cash proceeds reported on the 1099-B so you'd report

                 Proceeds Basis Gain
Long Term $6,302.56 $373.34 $5,929.22
Short Term      $57.83   $34.32      $23.50

Then you use the remaining $3.88 of cash as "proceeds" against the remaining 13.23% of EMC basis for

Long Term      $1,212.39       $307.57       $904.82
Short Term          $11.12           $7.53           $3.59

Tom, I found more details on the tax lots. I only had div reinvestments from 2014 to 2016. Could I send you the reports via email? Im ready to file my taxes, except for this one stock merger. It still has me perplexed. Your help is very appreciated. Thanks.

I'm a user like you so I'm not going to post my email in here since every spammer in the world with an Internet connection can see it.

But as I said, if ALL your EMC lots have a per share basis between $6.07 and $29.30 - which seems highly probable - then lumping them together the way you did will result in the exact right answer for income tax reporting purposes  - at least according to my interpretation of the deal..

This is a terribly complex deal and I GUARANTEE you that most income tax returns that report this transaction will be wrong.  Heck, I can't even claim with 100% certainty that I'm correct.  Even though I revel in the "small stuff" details I know as a practical matter that "close enough" usually suffices when it comes to income tax reporting.  The chances of getting  audited are incredibly long and most IRS auditors won't understand the deal either.  Go with my numbers, go with your original numbers, try you own hand at coming up with the numbers.  Do you best and go with it, and don't lose a minute of sleep.

Tom, I understand not wanting to list your email. I was able to copy and paste the info. Thanks.

Security Trans type Qty Open date    Adjcost.  Closedate Adjproceeds Adjgain ($) Adjgain (%) Term

DELL TECHNOLOGIES INC-CL V Sell.FIFO 0.1477 03/14/05 6.97 09/20/16 7.15 0.18 2.58 Long-term

EMC CORP 315.339 --- 534.57 --- 1,223.52 688.95 128.88 Multiple
Corp Action G/L 306 03/14/05 501.59 09/07/16 1,187.28 685.69 136.70 Long-term
Corp Action G/L 1.217 07/23/14 4.66 09/07/16 4.72 0.06 1.29 Long-term
Corp Action G/L 1.267 10/23/14 4.67 09/07/16 4.92 0.25 5.35 Long-term
Corp Action G/L 1.251 01/23/15 4.69 09/07/16 4.85 0.16 3.41 Long-term
Corp Action G/L 1.343 04/23/15 4.71 09/07/16 5.21 0.50 10.62 Long-term
Corp Action G/L 1.394 07/23/15 4.73 09/07/16 5.41 0.68 14.38 Long-term
Corp Action G/L 1.371 10/23/15 4.75 09/07/16 5.32 0.57 12.00 Short-term
Corp Action G/L 1.496 01/22/16 4.77 09/07/16 5.81 1.04 21.80 Short-term

EMC CORP 315.339 --- 3,506.14 --- 8,019.36 4,513.22 128.72 Multiple
Corp Action G/L 306 03/14/05 3,289.71 09/07/16 7,781.86 4,492.15 136.55 Long-term
Corp Action G/L 1.217 07/23/14 30.53 09/07/16 30.95 0.42 1.38 Long-term
Corp Action G/L 1.267 10/23/14 30.66 09/07/16 32.22 1.56 5.09 Long-term
Corp Action G/L 1.251 01/23/15 30.79 09/07/16 31.81 1.02 3.31 Long-term
Corp Action G/L 1.343 04/23/15 30.91 09/07/16 34.16 3.25 10.51 Long-term
Corp Action G/L 1.394 07/23/15 31.04 09/07/16 35.45 4.41 14.21 Long-term
Corp Action G/L 1.371 10/23/15 31.18 09/07/16 34.86 3.68 11.80 Short-term
Corp Action G/L 1.496 01/22/16 31.32 09/07/16 38.05 6.73 21.49 Short-term

Totals:  Adjcost 4,047.68. Adjproceed 9,250.03 Adjgain 5,202.35  Adjgain% 128.53

Symbol: DVMT
Description: DELL TECHNOLOGIES INC-CL V
Current quantity: 185
Current cost basis: 9,178.49
Long positions
 Date Transaction Qty Cost adjust. Cumulative shares Cumulative cost
09/07/16 Merger xxxxxxxxx (EMC) to 24703L103 (DVMT) 35.1477 1,658.97 35.1477 1,658.97
09/08/16 Buy 150 7,526.49 185.1477 9,185.46
09/20/16 Sell. -0.1477 -6.97 185 9,178.49

Symbol: EMC
Description: EMC CORP
Current quantity: 0
Current cost basis: 0.00
Long positions
Date Transaction Qty Cost adjust. Cumulative shares Cumulative cost
06/02/11 Internal Tax Lot Transfer 306 3,791.30 306 3,791.30
07/23/14 DivRe 1.217 35.19 307.217 3,826.49
10/23/14 DivRe 1.267 35.33 308.484 3,861.82
01/23/15 DivRe 1.251 35.48 309.735 3,897.30
04/23/15 DivRe 1.343 35.62 311.078 3,932.92
07/23/15 DivRe 1.394 35.77 312.472 3,968.69
10/23/15 DivRe 1.371 35.93 313.843 4,004.62
01/22/16 DivRe 1.496 36.09 315.339 4,040.71
09/07/16 Exchange xxxxxxxxx (EMC) to xxxxxxxxx (EMC) -315.339 -4,040.71 0 0.00

Symbol: EMC
Description: EMC CORP
Current quantity: 0
Current cost basis: 0.00
Long positions
Date Transaction Qty Cost adjust. Cumulative shares Cumulative cost
09/07/16 Exchange xxxxxxxxx (EMC) to xxxxxxxxx (EMC) 315.339 3,506.14 315.339 3,506.14
09/07/16 Merger xxxxxxxxx (EMC) to 24703L103 (DVMT) -315.339 -3,506.14 0 0.00

There's no need for me to do any more because the broker obviously has made ALL the calculations for you and even split the transaction into its two component parts, one for the Sec 351 calculation and the other for the Redemption calculation.

The reason I came up with different answers based on your summary information is because the "Cost Basis" figures you disclosed were not your actual cost figures for the shares; they are the cost figures the broker "derived" in order to come up with the correct gain to report on your 1099-B.

Thank you for your help. Have a nice day!

If it would be possible to walk through this step-by-step for how to do this in TurboTax including how to calculate before hand it would be super helpful.  Thoroughly confused.

This is extremely complicated, especially if you have a capital loss but for some reason can't take it (very unfair)

Here are my facts.  Had 40 shares of EMC and received a 1099-B that showed 80 shares sold along with a fractional number of shares in VMT of .4568.  My basis is from one lot purchased in 2001 for $1524.40.  The total value received was $24.05 per share on the 80 shares ($962) plus the 4.458 shares in DVMT valued at $47.20 per share for a total of $210.42.  Total value received would then be $1172.42.  So I assume my cost basis would be allocated to the EMC shares and the DVMT shares based on value.  My EMC basis would then be: Total EMC value of 962 divided by total value of $1172.42 = .82 x basis of $1524.40 = $1240.87.  My DVMT basis would be xxx.xx/xxxx.36 = .18 x $1524.40 = $273.53. 

As I'm reading the above, I should calculate the 351 portion 1st.

40 shares x 20.17 = $806.80 - basis ($1240.87 x .8677 = $1076.70) = loss -$269.90 which is not deductible and lost forever?  So I would report basis on this of $806.80?

40 shares x 3.88 = $155.20 - basis ($1240.87 x .1323 = $164.17 = loss of -$8.97 which is deductible.

The 1099 B reported the .458 fractional share sale at $22.20 and I would calculate my basis at (273.54/4.458 x .458 = $28.10) for a small loss of $$5.90

Tom, does this make sense to you???  I'm have a hard time understanding why I cant take a loss on the section 351 calculation though.