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ednamcg40
New Member

1099/

Is a reverse stock split with capital repayment a non taxable distribution?

4 Replies
TomYoung
Level 13

1099/

There's lots and lots of 1099s and knowing what 1099 you're looking at would be extremely helpful.

 

A reverse stock split, in and of itself, is generally not a taxable event except for, possibly, the sale of a fractional share reported on a 1099-B as "Cash in Lieu" (CIL).

 

Not sure what you're referring to by "capital repayment" but if it's a Return of Capital reported on a 1099-DIV that's typically not a taxable event until cumulative returns of capital exceed your adjusted cost basis.

ldcandcyc
Level 1

1099/

Tom Young, hello from Madison WI and *thank you* for so many instructive and detailed answers to all our TT questions.  I am hoping you might help with mine, esp since you seem to have good knowledge of how to handle the endless HP spinoffs.  In a nutshell: 

 

In September 2017 I received shares in HP spinoff Seattle SpinCo that automagically became 412 shares (actually ADRs) in the UK-based firm Micro Focus.  I have held those shares ever since.  In April/May 2019 Micro Focus went through a series of transactions that produced a large taxable dividend payment and what Fidelity has marked as a reverse stock split, causing my 412 shares to now become 314 shares of a very similarly named entity MicroFocus Int'l PLC.  (I also received cash in lieu of a fractional share at the time of that reverse split.)  Now I have a 1099-B from Fidelity which shows (in 5 lots) the sale of my 412 original shares of MFGP, but with $0.00 as the proceeds and unknown for both the cost basis and acquisition date.  I presume and some documentation from the UK company sets an expectation that the reverse split should not produce a tax liability.  But they give no guidance on how to report.  I can enter the acquisition dates and I can calculate my basis in each lot . . . but with $0.00 as the proceeds that would produce a loss which I didn't actually incur (since I have the new shares, which still have some value, in place of those which were sold).  Should I enter $0.00 as the cost basis in TurboTax?  This would produce the expected no net tax impact, which I believe is the correct outcome, but I really worry about putting anything into a return that seems at odds with the facts in hand.  I did search TTax help for any earlier answers to this specific question, but did not find one.  I apologize in advance if you have addressed the question re MFGP revers stock split and I failed to find it. Anyway, I would sincerely appreciate any insight you might share into this question--it would have been so much simpler had Fidelity issued a 1099 that made clear this was a move by the company's management and not any sale done at my direction.   Anyway, would welcome your guidance and am happy to get in touch some other way if that is more convenient.  --Leigh Cagan 

TomYoung
Level 13

1099/

The company has issued a Circular that discusses the transaction and provides guidance for US shareholders as to the federal income tax consequences of the transaction. You can get that Circular here

 

https://investors.microfocus.com/umbraco/surface/Disclaimer/ShowDisclaimerConfirm?mediaid=2273#

 

by selecting your country of residence and then clicking the "Submit" button. The specific section of the circular relating to US Federal Income Tax Consequences starts on page 43 of the Circular. I've pulled out the "meat" of this information as posted below:

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The summary of certain US federal income tax consequences set out below is for general

information only and is subject to the considerations set out above. It is not a substitute for

careful tax planning and advice. US holders are urged consult their own independent

professional tax adviser, as to the particular tax consequences to them of the B Share

Scheme, the applicability and effect of state, local, non-US and other tax laws (including the

US federal estate and gift tax laws) and possible changes in tax law.

 

1.1 General

The US federal income tax consequences of the B Share Scheme to US holders are not

entirely clear. That is, in part, because the B Share Scheme involves a series of transactions

executed under UK law for which there is no direct analogue under US federal income tax

laws. While the Section below sets forth the Company’s determination of the most likely

US federal income tax consequences of the B Share Scheme, certain other interpretations

are possible that could result in materially different US federal income tax consequences to

US holders.

 

As described above, the Company intends to redeem the B Shares in full shortly after, and

as part of the same plan as, the pro rata issuance of such B Shares to holders of Existing

Ordinary Shares. Accordingly, the Company intends to take the position that, for US federal

income tax purposes, the issuance of the B Shares should be disregarded and the

redemption price of the B Shares should be treated as a distribution of cash to holders of

Existing Ordinary Shares that is separate from the Share Capital Consolidation. In addition,

the Company intends to take the position that US holders should not recognise gain or loss

on the receipt of New Ordinary Shares pursuant to the Share Capital Consolidation (other

than with respect to any fractional entitlement to New Ordinary Shares for which cash is

received).

 

The remainder of this Section more fully discusses the US intended federal income tax

treatment of the B Share Scheme and certain of the potential consequences to US holders.

US holders are urged to consult their own independent professional tax advisers regarding

the appropriate characterisation of the B Share Scheme for US federal income tax purposes.

 

1.2 Receipt of B Shares

US holders should not recognise taxable income or loss as a result of the receipt of

B Shares.

 

1.3 Redemption of B Shares

The redemption proceeds paid to a US holder upon the redemption of B Shares should, to

the extent paid out of the current or accumulated earnings and profits of the Company (as

determined under US tax principles), be treated as a dividend for US federal income tax

purposes. Because the Company does not intend to determine its earnings and profits on

the basis of US federal income tax principles, any redemption proceeds paid generally will

be reported as a “dividend” for US federal income tax purposes. Any such dividend income

recognised by a US holder generally will be foreign source income. Individual US holders

generally are taxed on dividends at ordinary income rates. However, an individual US holder

that receives a dividend from a “qualified foreign corporation” may be eligible for reduced

rates of taxation, provided the US holder satisfies certain holding period and other

requirements. In order to be treated as a “qualified foreign corporation,” the Company must

be eligible for benefits of the United States income tax treaty with the United Kingdom.

Although the Company believes that it is currently eligible for such treaty benefits, there can

be no assurance that this will be the case for any taxable year or that such position would

not be challenged by the IRS or sustained by a court. Individual US holders should consult

their own independent professional tax advisers regarding their eligibility to claim such

reduced rate based on their particular circumstances.

 

To the extent that the redemption proceeds paid to a US holder exceed such US holder’s

allocable share of the Company’s current and accumulated earnings and profits (as

determined under US tax principles), the proceeds will first be treated as a tax-free return of

capital, causing a reduction in such US holder’s adjusted basis in its Ordinary Shares or

ADSs, and thereafter as gain from the sale or exchange of a capital asset. Any such gain or

loss generally would be capital gain. However, as indicated above, the Company expects to

report the entire payment of the B Share redemption proceeds as a dividend for US federal

income tax purposes.

 

Payment of the B Share redemption proceeds, as well as any amounts received with respect

to fractional share entitlement as a result of the Share Capital Consolidation, described

below, will be made in pounds sterling. Accordingly, the amount realised by a cash basis US

holder (or an electing accrual basis US holder) upon the receipt of pounds sterling generally

will equal the US dollar value of the pounds sterling calculated by reference to the

US dollar/pound sterling exchange rate in effect on the date the payment is includible in the

income of such US holder, regardless of whether the pounds sterling is converted into

US dollars on such date. If the pounds sterling received is not converted into US dollars on

such date, such US holder will have a tax basis in the pounds sterling equal to such US

dollar value and any gain or loss realised on a subsequent conversion or other disposal of

the pounds sterling will be treated as US source ordinary income or loss. Each US holder,

including an accrual basis US holder that has not elected to use the US dollar/pound sterling

exchange rate in effect on the date its redemption proceeds are includable in its income,

should consult with its own independent professional tax adviser as to the consequences in

its particular circumstances of the receipt and exchange of pounds sterling.

 

1.4 Share Capital Consolidation

Except to the extent of any fractional entitlement to New Ordinary Shares for which cash is

received (discussed below), US holders generally will not recognise gain or loss on the

receipt of New Ordinary Shares pursuant to the Share Capital Consolidation and should

have the same holding period and tax basis in the New Ordinary Shares received as they

had in their Existing Ordinary Shares.

 

If a US holder receives cash proceeds with respect to a fractional entitlement as a result of

the Share Capital Consolidation, such US holder should be treated as if a fractional share of

a New Ordinary Share had been received by the US holder as part of the Share Capital

Consolidation and then sold by such US holder. Accordingly, such US holder should

recognise gain or loss equal to the difference between the amount realised with respect to

such fractional share and the portion of the tax basis in its New Ordinary Shares that is

allocable to such fractional share. Such gain or loss will be treated for US federal income tax

purposes as capital gain or loss, which generally will be long-term capital gain or loss if the

Ordinary Shares or ADSs have been held for more than one year at the time the fractional

entitlements to the New Ordinary Shares are sold in the market. The net amount of long-term

capital gain recognised by a non-corporate US holder generally will be subject to reduced

rates of taxation. Any such gain realised by a US holder generally will constitute income from

sources within the United States for foreign tax credit purposes and constitute “passive

category” income for such purposes. The deductibility of capital losses is subject to

limitations.

 

US holders should not recognise taxable income or loss as a result of the receipt of Deferred

Shares.

 

1.5 Information reporting and backup withholding

In general, dividend payments with respect to Ordinary Shares and ADSs and proceeds from

the sale or other disposition of Ordinary Shares or ADSs made (or deemed made) within the

United States may be subject to information reporting to the IRS and US backup withholding

currently at a rate of 24 per cent. Backup withholding will generally not apply to a holder who:

  • furnishes a correct taxpayer identification number and certifies, under penalties of

perjury, that such holder is not subject to backup withholding on an IRS Form W-9, and

otherwise complies with applicable requirements of the backup withholding rules;

  • is a corporation or otherwise exempt from backup withholding and, when required,

demonstrates this fact in accordance with applicable Treasury regulations; or

  • provides a certification of non-US status on an IRS Form W-8BEN or W-8BEN-E (or

on an other applicable successor form).

 

Backup withholding is not an additional tax. Amounts withheld under the backup withholding

rules may be allowed as a credit against a holder’s US federal income tax liability and may

entitle the holder to a refund, provided the holder timely furnishes the required information

to the IRS. US holders should consult their own independent professional tax advisers

regarding the application of the information reporting and backup withholding rules.

 

The preceding discussion is intended only as a summary of certain US federal income

tax consequences of the B Share Scheme for US holders of Ordinary Shares or ADSs,

as applicable, and does not purport to be a complete analysis or discussion of all

potential tax consequences relevant thereto. US holders are urged to consult their

own independent professional tax advisers as to the specific tax consequences to

them of the B Share Scheme, including tax return reporting requirements, the

applicability and effect of US federal, state, and local and non-US tax laws, and the

effect of any proposed changes in the tax laws.

 

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My impression - and that's all it is because I haven't taken the time to fully comprehend the transaction - is that you're on the right track here and could simply enter "$0.00" as the basis.  But you should probably read the entire relevant section of the Circular and come to your own conclusion.

ldcandcyc
Level 1

1099/

Tom, thank you for this.  I will review the reference document with care and note at 1.2 Receipt of B Shares on page 45 it states the receipt of these shares should not result in taxable income or loss.  Appreciate your quick and helpful assistance.  

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