Tax on shares from Domestic and international company merger

Forum|Forum|7 years ago
June 1, 2019
2 replies
4 views

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.

TurboTax Deluxe Windows

Best answer by TomYoung

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

T

TomYoung

Answer

Alumni - Champ

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

H

hugoAuthor

Level 2

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?

J

Jaysee7

Level 2

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

Critter-3

Level 15

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.