How do I handle the cash from a stock and cash merger?

[anibert91]

I received cash and stock in the CenturyLink and Level 3 merger. I had two lots of Level 3 purchased on the same date.  The date purchased was 01/08/07. The cost basis of each was (187 shrs) $11760 and (109 shrs) $9189.60.  How do I handle the cash portions of the merger $4955.50 and $2888.50?  The proceeds shown are on the sale of all Level 3 shares.  All shares are noncovered securities.

[TomYoung]

These sorts of deals typically require a lot-by-lot calculation, which is pretty easy in this case. 

The guidance provided by the company far as determining gain (but not loss) is standard boilerplate:

"Level 3 common stock will generally recognize gain (but not loss) in an amount equal to the lesser of (1) the amount of gain realized (i.e., the excess, if any, of the sum of the amount of cash (other than cash received in lieu of a fractional share of CenturyLink common stock) and the fair market value, as of the effective time of the combination, of the CenturyLink common stock received in the combination over that stockholder’s adjusted tax basis in its Level 3 common stock surrendered) and (2) the amount of cash received in the combination"

Using a per share fair market value of $18.99 per share for CenturyLink your total proceeds for the first lot are:

(187 x $26.50) + (267.1482 x $18.99) = $10,028.64 so your "economic" gain/loss is

$10,028.64 - $11,760.00 = $(1,731.36)

Since you can't recognize a loss you set your basis against whatever "proceeds" the broker is reporting, which might be only the cash or might be the combination of cash plus stock, to the same amount as the proceeds, reporting no gain or loss.

You also have a loss on the second lot so with the second lot, too, you'd report basis equal to the reported proceeds.

Tom Young