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Author: synchronicity Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: Re: Calculating Tax Basis on Mergers and Spin-of Date: 4/7/1998 11:28 PM
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The quick answer is that it differs for every merger/spin-off. Many mergers are non-taxable, in which case you allocate the cost basis in some ways to your new shares, but some mergers aren't, in which case you might be considered to have sold your old shares to receive the new. Looking at your examples:

A) 100 shares of V (1000 cost) exchanged for 300 shares of W. IF (big if) this is a non-taxable exchange, then you'd probably carry-over your cost basis from your old shares to your new (300 shares with 1000 cost). You'd also carry over the old holding period to the new stock. If a taxable exchange, then it could be considered a sale of the old stock in exchange for the new at FMV, and you DON'T carry over the holding period.

B) 100 shares of Y, there's a spin-off, and you get 25 shares of Z. If non-taxable, this is essentially GM/Raytheon, where you allocate a percentage of your old cost to the new shares (% differs depending on FMV's of the stocks involved)and carryover the holding period. If taxable, then the receipt of the new shares could be considered dividend income to the extent of FMV of the new shares.

There are some other possible results, which is why you should find out the tax treatment for your particular merger.

As for finding out the tax treatment of these exchanges, check with the company (either at their website or by phone. Hey, you're a shareholder, you need to know the info, the company should tell you!). Your broker may also tell you the tax consequences. There are also a number of services that publish the tax treament for all these exchanges (CCH is one), but they all cost money (I work at a financial institution and we get CCH on-line, but then we have to do these darn basis calculations every day).

And speaking of basis calculations: I have several excel spreadsheets that can calculate the cost adjustments for all types of mergers and spinoffs (including ones that are taxable to the extent of cash received ('boot'). If any Fools out there could find them useful, let me know. (Need Excel 5.0 or better)

-synchronicity
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