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I own 1416 shares of Anadarko Petroleum. Anadarko management deems that Occidental Petroleum's offer of $59.00 and .2496 Occidental shares per Anadarko share is the best offer for its shareholders.

How would the cash received in this merger be treated for tax purposes?

Receiving $59.00 per share would exceed my current investment in Anadarko; however, if I price the .2496 Occidental shares at their current market price, the value of the transaction is roughly equal to the current market value of my Anadarko holdings.

Is the cash received regarded as a return of capital reducing the cost basis of the Occidental shares that I receive with capital gains/losses being determined when I eventually sell the Occidental shares?
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How would the cash received in this merger be treated for tax purposes?

It will depend on specifically how the deal is structured, so you will need to wait for the terms to be provided to you.

Is the cash received regarded as a return of capital reducing the cost basis of the Occidental shares that I receive with capital gains/losses being determined when I eventually sell the Occidental shares?

Possibly. Or it could be that the cash received is due to selling part of your stock, and the basis will need to be allocated between the cash and the shares that you receive. Again, it depends on the structure of the deal whether to cash received is considered return of capital or a sale.

AJ
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The default treatment in a transaction like this is that you have sold everything, with the sale price measured by the FMV of what you received. For you, that would be the cash plus the FMV of the Occidential stock you receive.

Fortunately, most of the time management will arrange the transaction so that some part of it is tax deferred. But that is up to management to make that choice. They are the only ones who can tell you how the transaction will be taxed.

The typical tax-deferred scenario would be to allocate your cost between the cash and FMV of the shares received. The cash portion would then be treated as a sale and the shares received would take on the cost basis and acquisition date of the shares you had to surrender. But again, this is only one possibility.

Management will tell you exactly how the transaction is treated for tax purposes.

--Peter
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When you receive cash, it is almost always taxed as a capital gain based on the original cost and purchase date. The new shares retain their original cost and usually the original purchase date, but are not taxed until sold.
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When you receive cash, it is almost always taxed as a capital gain based on the original cost and purchase date. The new shares retain their original cost and usually the original purchase date, but are not taxed until sold.

I am more familiar with mergers where you where you adjust the shares held in each lot that you had purchased with the number of shares you received from the acquiring company. Each lot retains its original cost basis. If I receive only .2493 shares for each share that I hold but retained the original lots cost basis, the per share cost basis would be unrealistically high.

How do you adjust the cost basis of each lot to reflect the cash that you received in addition to the shares?
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Fortunately, most of the time management will arrange the transaction so that some part of it is tax deferred. But that is up to management to make that choice.

Few mergers are being allowed to be tax deferred. The tax deferred exchange must be approved and not just that management has to apply for the status.

Even if stock is received in the exchange, the transaction may still be fully taxable.
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How do you adjust the cost basis of each lot to reflect the cash that you received in addition to the shares?

irasmilo pointed us to this resource: http://costbasis.com/ in a recent thread about a different merger that you should be able to use after the merger is finalized.

AJ
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How do you adjust the cost basis of each lot to reflect the cash that you received in addition to the shares?

You received 1.2493 shares for each old share you owned. The 1 in cash. The 0.2493 in shares. So cost for the new shares is the cost of your original share divided by 1.2493.
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