Message Font: Serif | Sans-Serif

No. of Recommendations: 0

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! :-(

Regards,

BostonBear

### Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.