How do I report the gain from the HPE to Micro Focus spin-merger in TurboTax Deluxe?

I expect you will get a 1099-B for the exchange of the Seattle stock for the Micro Focus ADSs.  They generally get distributed mid-February.

But if you know what that 1099-B is going to report - and you should have a pretty good idea as you've read the Form 8937 - then you could file and tell TurboTax no 1099-B was received.

Tom Young

Tom, Thank you.  We did get an amended 1099-B in mid-February.  It was easy from there.

Just in case you owned HP prior to 2015.  In 2015 Split of HPQ and HPE  47.15% basis to HPQ and 52.85% basis to , HPE  http://h30261.www3.hp.com/faq/separation-faqs.aspx

I just went through all the HPE spin offs for 2017

You can not have losses, they just reduce cost basis.  A few Cash in Lieu (CIL) and  a Seattle Co sale , you then increase your basis in the new company Micro Focus by the basis you had allocated to Seattle Class A plus the gain recognized.

Took me a while to figure it all out. Here are links to HPE basis allocations.

There were 2 spinoffs/reorganizations from HPE this year.

1. was 3/31 Everett distribution, merged to CSC, and CSC is surviving company: HPE 75.1% of basis, Everett 24.9% and you got .085904 shares of Everett for every HPE.  You may have CIL, Ultimately Everett named DXC Technologies.

http://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/everett-6045B-statement-form8937... 

2. 9/1 distribution Seattle Class A, Micro Focus.  HPE basis 77.92%, Seattle Co 22.08% got 1 for 1 and Seattle co gets sold recognize a gain, no losses.  Allocate the Seattle Co basis plus the gain (plus the loss) to ultimate shares of MicroFocus .13732611 Micro Focus ADS for every Seattle co. 

http://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/seattle-6045b-statement-26092017... 

If you want to post your math, I will review it but it takes a lot of time doing each allocation.

Maglib, Thank you for the links to the documents.  I think we can figure it out from here.

you are welcome....  the end part is confusing at best of moving basis to the new Microfocus

What if your shares are part of the ESPP program, do you have to report 15% of gains as ordinary income - this is not an actual sale of the stock. The 367(a) forces you to pay taxes on gains, but how do the ESPP interact with it?

Good question.  I would think the reorganization would follow the same rules as recognition of gains and no losses in the reorg.  Your employer would have calculated the gain to include in your w-2 if there was income to recognize and you would have gotten a 1099B just like anyone else received in the reorg.  I found these:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-wd/0317023.pdf">https://www.irs.gov/pub/irs-wd/0317023.pdf</a>  and  <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-wd/201519031.pdf">https://www.irs.gov/pub/irs-wd/201519031.pdf</a>  I would think your employer would have sent some information.

If you participated in an employee stock purchase  plan:
You don't include any amount in your gross income as a result of the grant or exercise of your option to purchase stock.
You may have to report compensation on line 7 of Form 1040, U.S. Individual Income Tax Return, and capital gain or loss on Schedule D (Form 1040), Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets, when you sell the stock.
The amount of compensation and capital gain or loss depends on whether you satisfy the holding period requirement.
You satisfy the holding period requirement if you don't sell the stock until the end of the:
The 1-year period after the stock was transferred to you, AND
The 2-year period after the option was granted
You should receive a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c), from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option. This form will assist you with the tracking of your holding period and your cost basis for the stock purchased through your qualifying plan.

I am retired so I do not received any W2's. The ESPP stock (15% discount with after-tax dollars) was moved to Fidelity after I left the company (all holding periods satisfied long ago). I understand the 367(a) taxes and the ESPP taxes if they were each done standalone. But done together in the HPE/Seattle Spinco/MFGP spinoff I dont know if the ESPP rules apply since I havent really sold anything. Do I have to pay the ESPP ordinary income part now as part of the spinoff? If so, do I have to pay ordinary income part again when I actually sell the MFGP stock? Or is the ESPP part delayed and only triggered for a actual sale? I know that the MFGP cost basis gets revised as part of the 367(a) spinoff.

then these are securities I would believe have a bargain purchase element that must be recognized as ordinary income.

So pay the ESPP ordinary income part now on current gains (due to 367(a) spinoff) and then pay the ESPP ordinary income part again later on future gains when the MFGP stock is actually sold?

And whatever the answer I'd love to see a cite.

she is retired no longer is an employee.  She owned them for over 3 years.

There's no "expiration date" on a stock acquired via an ESPP creating ordinary income.

The real issue here is whether a spin-off creates another share with ESPP attributes and I've never figured out that answer, definitively.  I think that's an element of Bodie7's question here.

I can't see how a pure tax free spin-off creates any obligation to recognize ordinary income if you happen to hold shares acquired via an ESPP.  There's no 1099-B created in this case which is the signal that a sale has taken place.

This is not a tax free spinoff. Since MFGP is a foreign company, rule 367(a) applies and all profits up to the spinoff must be recognized and taxed. (no losses allowed) There is a 1099-B created for the spinoff under Seattle Spinco. Here is the spinoff order HPE->Seattle Spinco->MFGP.  It shows the proceeds as the value of all Seattle Spinco shares at FMV merger price.

Yes the merger with Micro Focus is clearly a sale and I know a 1099-B was issued in that transaction.  I've dealt with that transaction several times in here.

I was referring to the spin off of Seattle Spinco, which was tax free.  The question is: are the Seattle Spinco shares received also "ESPP shares"?  It seems like logically they must be but "logic" and "income taxes" hardly ever appear in the same sentence and I've never been able to pin that question down definitively.  This is another question I've dealt with several times over the years.  In at least once case the poster claimed, based on W-2 reporting due to a sale of parent company stock, that all the ESPP elements remained with the parent company stock, i.e., there was no unaccounted for discount to be attributed to the spun off company stock, but since I couldn't really see any documentation I'm uncertain if that claim is correct or not.

Also I noticed some spinoffs are using 3 entities,  HPE->Everett->DXC and some are using only 2, HPQ->HPE.  In anycase,  I just "assume" the ESPP part will be passed on to spinoff company in the proper ratios. I haven't sold any of my ESPP stocks so I didn't have to worry about it till now.  Thanks for your replies.

I guess the 2 entity spinoff is a pure spinoff, and the 3 entity one is a spinoff/merger with another company. Does this make any difference with ESPP?

@Bodie7 I just found this  <a rel="nofollow" target="_blank" href="http://www.hpalumni.org/stock">http://www.hpalumni.org/stock</a>   walks you through the whole reporting...and even provides retirees contact information!  My limited 5 min cursory review it seems yes there are tax consequences and yes the bargain purchase element will be ordinary income.

Thanks marlib, I have been using their site, spreadsheets, and forums. Really great info there but there were still was some questions about whether or not this 367(a) would trigger an ESPP event or whether the ESPP event could be delayed until the actual sale of the MFGP stock.  Seen indications both ways on their forum with no definitive answer so I thought I would ask here. The 367(a) foreign spinoff/merger has not occurred with an HP stock spinoff before, so there are still questions on how it interacts with ESPP. Guess it is best to error on the side that it does trigger an ESPP event and report the ordinary income. They do have all the info out there to work out all of the calculations needed. They did a great job. Thanks for your reply and assistance.

"I guess the 2 entity spinoff is a pure spinoff, and the 3 entity one is a spinoff/merger with another company. Does this make any difference with ESPP?"

In my opinion, "Yes".  

It's the "sale" of stock acquired via an ESPP that creates compensation income and a tax-free spin off simply is not a sale.  It would seem like the basis allocation required when a spin off occurs would apply equally to shares acquired via an ESPP.  So all of the "per share" numbers on the Form 3922 would be allocated in a similar fashion.

So, logically, the spin-off of SeattleCo would result in those shares also being considered as "acquired via an ESPP" but would not generate compensation income because no sale has occurred.  However the tendering of the SeattleCo shares for MicroFocus is, legally, a sale and would create any ESPP compensation income.  To make that more clear, you could have immediately sold your MicroFocus shares, at no gain or loss, and converted the proceeds of your SeattleCo shares from "stock" to "cash."

Thanks Tom, that makes sense.

maglib - So I'm really confused.  I just talked w my broker who says for the 1099-B entry for the Seattle Spinco transaction that I should enter cost basis of 0 so gains matches proceeds (even though I didn't receive any cash).   It appears some folks are calculating a cost basis for this.  If I do use 0 as a cost basis, would I then simply add that gain to the cost basis of the microfocus stocks when I do sell those?   The 1099-B from the broker simply had no entry for cost basis on this and listed 0 as gain.   The 1099 shows total Seattle Spinco entry of 5898 shares for total of 23764.59.   I'd love any response/help you could give maglib.

page 5 clearly indicates basis allocation to spinco  <a rel="nofollow" target="_blank" href="http://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/seattle-6045b-statement-26092017.pdf">http://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/seattle-6045b-statement-26092017.pdf</a>  Your cost basis and your proceeds would match basically and there is no gain.  I know both TD Ameritrade reported cost to be same as proceeds for net $0 gain on spinco which matches what is reported. Ultimately that basis moved to Micro focus. You could take no losses in any of the transactions.  Basically seattle co  became Microfocus although it was reported as a sale, you got same interest in Microfocus as you had in spinco if that makes sense.

Thanks maglib - That's what I initially thought.  But then looking at the HP Alumni spreadsheet (post2000 one),  it works up the gains for the Seattle SpinCo which should be on the 1099B.  The spreadsheet creator also states that the SpinCo transaction would also require reporting elements (certain ESPP shares) as ordinary income as well).    Still confused.   My broker only supplied a 1099B w the number of shares and 'Proceeds' listed with an empty cost basis box and zero entered for Gains/Losses.  TurboTax wants me to enter the basis since it's missing.  From what I think you said, I'm safe to enter the same amount from Proceeds in the cost basis box.  Correct?  Thanks again.