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Here's an unusual situation that I'm faced with this year... anyone know the answer?

I'll present the situation using a simple example:

1. I'm in my company's Employee Stock Purchase Plan.

2. On 4/30/98 I buy 100 shares of my company (say company ABC) for 85% of the fair market value on 4/30/98. Say the fair market value was $30 a share. That would mean my purchase price is $25.50. So I buy 100 shares for $25.50 each. Now, if I were to sell these shares without holding them for at least a year, the difference between fair market value ($30) and the purchase price ($25.50) would be taxed as ordinary income...

Still with me? Here comes the hard part...

3. On 8/28/98 Company XYZ buys my company (ABC) for stock. As it turns out, I get .6 shares of XYZ for each share of ABC I own. Hence, I now own 60 shares of XYZ. My original purchase price was $25.50. Now my cost basis has changed to $42.50 and I own 60 shares of XYZ. I get my new cost basis by (2550/60). $2550 is what I originally paid for my 100 shares of ABC.

4. I sell all 60 shares of XYZ on 10/20/98 (less than 1 year holding period) for $55 a share.

Here comes the big question: WHAT'S THE FAIR MARKET VALUE OF MY SHARES? That is, how do I calculate the ordinary income portion of this sale?

My guess is that the fair market value of the shares remains $30 regardless of the stock buyout. Since my cost basis is $42.50, and the fair market value is $30, there is no ordinary income here... it's all a short term capital gain, yes?

Taxes are such much fun! :-(


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