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Just wanted to stop in here to get a clarification on my thinking regarding a recent stock transaction.

Quite a few years ago, I had been holding stock in ZDNet (ZDZ) and that was acquired by CNet in October of 2000 (10/17). For each share of ZDZ, I received 0.5932 shares of CNet stock.

This year I sold the CNet stock. If I am correct, I believe I would report the basis as the original purchase of ZDZ. As an example, consider the following:

Bought 50 ZDZ @ $10.00 = $500.00
Merger 50 ZDZ become 29 CNET
Sold 29 CNET @ $5.00 = $145.00

Transaction results in loss of $355.00, is that correct? Or do I use the price from 10/17/2000 when my ZDZ became CNET stock?

dt
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Quite a few years ago, I had been holding stock in ZDNet (ZDZ) and that was acquired by CNet in October of 2000 (10/17). For each share of ZDZ, I received 0.5932 shares of CNet stock.

This year I sold the CNet stock. If I am correct, I believe I would report the basis as the original purchase of ZDZ. As an example, consider the following:

Bought 50 ZDZ @ $10.00 = $500.00
Merger 50 ZDZ become 29 CNET
Sold 29 CNET @ $5.00 = $145.00

Transaction results in loss of $355.00, is that correct? Or do I use the price from 10/17/2000 when my ZDZ became CNET stock?


Beats me. This is why we constantly harp about doing basis adjustments at the time of the split/merger/spinoff, not years down the road when you sell.

The answer to your question lies in the paperwork you got in 2000. If you can't find it, maybe investor relations could tell you or you could try the CNet board here.

It could be worse. Any day now we should get our annual post from someone whose grandparents gave him a share of AT&T 60 years ago.

Phil

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The answer to your question lies in the paperwork you got in 2000. If you can't find it, maybe investor relations could tell you or you could try the CNet board here.

What would the paperword show me? I know the dates of everything and the prices at each transaction, I am just wondering how the basis is determined for a stock that is acquired by another company.

dt
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What would the paperword show me? I know the dates of everything and the prices at each transaction, I am just wondering how the basis is determined for a stock that is acquired by another company.

It depends on how the transaction is structured. Each one gets its own treatment. There are some things that "usually" happen, but to determine what it was for this takeover you need to see what its tax treatment was.

Phil
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It could be worse. Any day now we should get our annual post from someone whose grandparents gave him a share of AT&T 60 years ago.

Hmmmm. Lemme see. My mother inherited AT&T back in 1931 (75 years ago!) when her father died. I received some as a gift in mid-1970-something. Divestiture in 1984. Mergers / takeovers / spinoffs over the years.

Y'mean something like that?

;^Þ

Mind you, I'm not asking any basis questions, though.

~~ Alison
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Mind you, I'm not asking any basis questions, though.

While googling to find the divestiture date, there was a link to a "divestiture cost basis tracker" for $119 (special discount this week for $89).

~~ Alison
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Mind you, I'm not asking any basis questions, though.

If there weren't any dividend reinvestments I would be tempted to just use a cost basis of zero. Seventy-five years is a lot of compounding.

- Megan
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If there weren't any dividend reinvestments

I knew there was something I'd forgotten to mention. But of course there were -- although I don't know about the history before I got my hot little hands on the stuff.

Seventy-five years is a lot of compounding.

Seriously!

~~ Alison



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What would the paperword show me?

Amongst other things, it will tell you how to calculate your basis in the new shares.

I am just wondering how the basis is determined for a stock that is acquired by another company.

There is no one way to do that.

There are 7 different ways in the tax code to structure a corporate reorganization so that is it is [mostly] tax-free at the time. Each method results in a slightly different tax result. But corporations are not required to make their reorganizations tax-free. They could have used a taxable reorganization.

In short, the only one who can answer your question with any authority is the company involved.

--Peter
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Peter,

There are 7 different ways in the tax code to structure a corporate reorganization so that is it is [mostly] tax-free at the time. Each method results in a slightly different tax result. But corporations are not required to make their reorganizations tax-free. They could have used a taxable reorganization.

In short, the only one who can answer your question with any authority is the company involved.


Thank you for the additional explanation. It looks like I will be spending a few minutes to look through my records and if I cannot find the documentation, I will be contacting the company.

dt
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Bought 50 ZDZ @ $10.00 = $500.00
Merger 50 ZDZ become 29 CNET
Sold 29 CNET @ $5.00 = $145.00


In my book, 50 x 0.5932 = 29.66, so you would probably have also received a cash payment in lieu of the 0.66 shares, which definitely complicates basis issues.
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What would the paperwork show me? I know the dates of everything and the prices at each transaction, I am just wondering how the basis is determined for a stock that is acquired by another company.

dt


Often, there is a fractional share that they give you cash for. (well, a check.) You have to subtract that from your basis. Especially with the weird number of shares/share, you are more likely to get cash back for the fractional share.

Vickifool
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In my book, 50 x 0.5932 = 29.66, so you would probably have also received a cash payment in lieu of the 0.66 shares, which definitely complicates basis issues.

Yes, I did receive a small cash payment at the time of the merger. I've contact CNet Investor Relations but have yet to get a response from them. In my E*Trade records, I have statements showing the merger but have not found any additional documentation regarding the transaction.

dt
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Merger agreement filing: link omitted

That is part of my question, do I use the numbers in that merger agreement to determine my basis? Given the fractional share paid in cash, I need to account for that as well.

dt
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Often, there is a fractional share that they give you cash for. (well, a check.) You have to subtract that from your basis. Especially with the weird number of shares/share, you are more likely to get cash back for the fractional share.

Yes, there was a cash payment made and is noted in my old account statements.

dt
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And my question is --- if nobody can figure out how to handle the transaction, how can the IRS do so?

Christine
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And my question is --- if nobody can figure out how to handle the transaction, how can the IRS do so?

The IRS need not do so. Only you do. If you're audited, and your method isn't sufficient, then the IRS can insist you claim a cost basis of zero.
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If you weren't taxed on it at the time, you old cost basis becomes your new cost basis. The value of the shares at the time are only relavent if all or part of the transaction was immediately taxable.

Bought 50 ZDZ @ $10.00 = $500.00
Merger 50 ZDZ become 29 CNET
Cash paid for partial share
Sold 29 CNET @ $5.00 = $145.00

$500/29.66 = $16.85
$16.85 * 29 = $488.65

$488.65-$145 = $343.65 loss

The actual amount you received for the partial share really doesn't matter. Just reduce your cost basis by the proportional amount of the partial share.

Debra
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If you weren't taxed on it at the time,

That's a REALLY big if.

--Peter
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The IRS need not do so. Only you do. If you're audited, and your method isn't sufficient, then the IRS can insist you claim a cost basis of zero.

I guess I could use that as my worst-case. Given the low number of shares, it is not like it would make much of a difference either in terms of being taxed on that gain. Missing the chance to claim the loss would sting a little bit though.

But back to the reason I started this, what is the "sufficient" method when dealing with a merger? Is my basis figured on the amount of the original purchase or the value at the time of the merger? Also, as noted earlier in the thread, I have the fractional share paid in cash to deduct from my basis.

dt
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If you weren't taxed on it at the time, you old cost basis becomes your new cost basis. The value of the shares at the time are only relavent if all or part of the transaction was immediately taxable.

Thank you! This was the assumption that I was under with how this would be handled but came here to get additional feedback.

dt
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That's a REALLY big if.

Correct me if I am wrong but wouldn't I have received a 1099 that year if it was taxed at the time of the merger?

dt
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Correct me if I am wrong but wouldn't I have received a 1099 that year if it was taxed at the time of the merger?

Not necessarily. But you almost certainly DID receive a 1099B for the sale of the fractional share involved in the merger.

But enough of this speculation. Since it seems everyone is too lazy to simply go to the CNET website and look, I took a couple of minutes and did so.

Amazingly, by looking at the investor relations portion of their web site, I was directed to their SEC filings. Lo and behold, what did I find there? An SEC filing from September 8, 2000, detailing the merger and the tax consequences. Took me all of about 5 minutes to find the answer.

I'm sorely tempted to leave it at that. The answer is there, right at the company web site where several people mentioned it might be found. It's not even that difficult to find the information in the filing. Probably because it's listed in the index under "Material United States Federal Income Tax Consequences."

But I guess I'll just give you the answer in the back of the book.

Their intention is that the merger would qualify as a tax-free reorganization under IRC section 368(a). No gain or loss recognized at the merger. Basis of the ZDNet stock becomes the basis in the CNET stock, and the holding period goes back to your original purchase date.

There. Put this one to bed.

--Peter

PS - Oh, what the heck. Here's the link. Last item on the page, dated 09/08/00.
http://ir.cnetnetworks.com/phoenix.zhtml?c=67325&p=irol-sec&secCat01.1_rs=301&secCat01.1_rc=10
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"...Since it seems everyone is too lazy to simply go to the CNET website and look, I took a couple of minutes and did so..."

Since apparently you were to lazy to check the whole thread before flinging insults around, I thought I'd point you to the appropriate spot.

Throwing stones in a glass house???

http://boards.fool.com/Message.asp?mid=25026281
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But enough of this speculation. Since it seems everyone is too lazy to simply go to the CNET website and look, I took a couple of minutes and did so.

Well, since I started the post I wouldn't expect everyone to go there. And I did visit the CNet site and found details of the merger, but I did not know what I was looking for in terms of the tax implications and had not seen the piece you referenced.

I appreciate your help and direction to the answer at the back of the book.

dt
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I appreciate your help and direction to the answer at the back of the book.

You're welcome. And I apologize for the tone of that post. It was uncalled for.

--Peter
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You're welcome. And I apologize for the tone of that post. It was uncalled for.

No need to apologize. I'm sure it gets frustrating when people come here and expect to be handed the answer. I can appreciate that being a *computer guy* as I always get inquiries to fix things.

With that said, I know it doesn't mean much to the work you did to get me the answer but I was looking, contacting CNet Investor Relations, searching old records, etc.

Thanks again to everyone for the help!

dt
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That's a REALLY big if.

--Peter


It is a significant if, but I have yet to be taxed on stock exchanged in a merger/buy out/spin-off.

Debra
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It is a significant if, but I have yet to be taxed on stock exchanged in a merger/buy out/spin-off.

You've been lucky. Many recent buyouts have been "stock plus boot" (eg. Bank of America/MBNA). These can have a partially taxable component to them. There are also some examples of taxable spinoffs (IIRC, there was one by an oil transport company about a year ago). Unfortunately, I get to see many of these when they are owned by investment clubs and the treasurers don't know how to handle them.

Ira

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Also, as noted earlier in the thread, I have the fractional share paid in cash to deduct from my basis.

Technically, the cash in lieu should have been treated as the sale of a fractional share (0.66 share)of stock, with a basis of 0.66/29.66 times your basis in the original lot. The basis of your remaining 29 shares would be 29/29.66 times the basis of your original lot.

From the link Peter supplied, discussing US tax consequences:

- you will generally recognize capital gain or loss on any cash received in lieu of a fractional share of CNET common stock equal to the difference between the amount of cash received and the basis allocated to such fractional share

If you didn't treat the cash in lieu properly on the return for the year you received it, I suppose the most accurate way to fix that would be to file an amended return. If the amount looks immaterial, I'd be inclined to let it slide and just do the 2006 return correctly.

Patzer
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