There have been many questions on this forum about reporting mergers in TurboTax (Premier edition), but I could not find one that provides a comprehensive answer on how to use the worksheets or interviews to deal with mergers. So my apologies if this has already been answered properly somewhere else; the closest I see is Does Turbo Tax Premier allow reporting of a stock and cash exchange on a merger?.
For my specific situation, I am filing taxes that involve receipts from the GRAIL / Illumina merger. It is a section 368(a)(1)(A) tax-free merger. GRAIL shareholders exchanged their shares for Illumina shares and a boot consisting of cash and contingent value rights. In my understanding, we have to recognize gain from this boot as per section 356.
I received a 1099-B from the transfer agent indicating the total cash consideration received as part of the boot with cost basis not reported to the IRS. To report this properly, we would need to break down the amount lot by lot and mark each item as short-term or long-term, and with cost basis as the original basis minus the basis held by the stocks part of the consideration (given in this IRS pub). There are additional complications if these shares came from ISOs. Because the interview flow and worksheets are available only for the sale of shares from ISOs, and not for exchange with boot, there is weirdness around number of shares sold and their cost basis. The interview flow currently does not allow us to correctly mark the exercise price of the lot but also say that the cost basis of the cash we received is 0. I could kind of work around it by overriding the cells in the Employee Stock Transaction Worksheet (part IV, item 20) and putting in the numbers I wanted, saying that I sold all the shares in the lot, with cost basis as 0, and Allocated Sales Price as the cash I received in the boot. Note that I filled in my Form 3921 information as-is in part IV, item 18 of the same worksheet.
I think the long-term and short-term capital gains numbers that come out after overriding the Allocated Sales Price and Cost Basis cells are correct. I am however unsure of how to deal with ISOs that were exercised less than one year before the merger event. Generally, a sale of a share from an ISO within one year of exercise generates compensation income equal to the bargain element. But section 356 is unclear on this subject.
I have 3 questions:
1. If we do have to generate compensation income for share lots that came from exercising ISOs less than one year before the merger event (or ISOs granted less than 2 years before the merger event), should the amount of income be the lesser of the amount of cash received and the bargain element, or is it exactly equal to the bargain element? Section 356 is clear that we can not realize a loss on any lot, so this question is actually important if the bargain element is more than the cash received in the boot.
2. How do we report the contingent value rights part of the boot? They are currently not traded freely and so their FMV is not determined and I am inclined to use the Installment Sales method. We did not receive any payments from these in 2021.
3. Is this way of reporting mergers acceptable? Do I have a way of adding additional information for the IRS that the "sales proceeds" here are boot from a reorganization? Should I be sending in additional supporting documentation by mail?
Thank you.
Edit: corrected what the basis should be
