I suppose you saw this paragraph at
"Investors who are registered holders of May common stock will receive a
packet of information in the mail from The Bank of New York within
approximately two weeks of the August 30, 2005 Effective Date of the merger.
This packet will have information on how to exchange May common stock for
the merger consideration, which is $17.75 in cash and 0.3115 shares of
Federated Department Stores, Inc. common stock, plus cash in lieu of
fractional shares, for each share of May common."
You should have received that packet Tuesday - or Real Soon Now. That
should include this not-very-helpful paragraph on Page 7 of the
"Instructions, including questions and answers":
"12. What are the tax consequences of the merger to shareholders ?
"The cash portion of the exchange is expected to be subject to United States
federal income tax at the capital gains rate. Shares of Federated Stock
issued in the exchange will generally not be subject to any gain or loss for
United States federal income tax purposes. You should review the joint proxy
statement/prospectus that you received before the July 13, 2005 shareholder
meeting and consult your tax advisor for information relating to your
Unfortunately, all the info I've seen so far on their website focuses on
urging May Co. shareholders to sign up for Federated's Dividend Reinvestment
Plan, rather than explaining shareholders' tax treatment in reasonable
There's no way that even a tax expert can advise you on this transaction
without knowing the specific terms of the transaction INCLUDING any special
ruling from the IRS that the company's attorneys probably received before
the deal was done. Chances are, those attorneys very carefully structured
the transaction so that it would fit within some specific section of the
Internal Revenue Code, then got the IRS ruling that, yes, if carried out in
exactly that way, it would so qualify. But the only way to find out those
details is in official company documents.
Mergers can happen in dozens (hundreds? thousands?) of different ways. Tax
treatment of the shareholders depends on which of those ways are used for
THIS merger. It does us no good to see how some other companies did it, or
how this company managed some earlier merger.
My GUESS, based on the two paragraphs quoted above, is that you would first
record the $17.75 per share cash as a Return of Capital, reducing your basis
on each share. If you had purchased a share for $50, your new basis in that
share would be $32.25. If you purchased another share for $10, your basis
in that would be reduced to zero, plus you would report a $7.75 long-term or
short-term capital gain on that share. You could not simply report that you
sold that share for $17.75 because you still own the share - until you
exchange it for 0.3115 share of Federated. You cannot have a "negative
basis" in the May stock but it can be zero, so if your basis is reduced to
zero, any excess is recognized as a gain.
After reducing your share-by-share basis by $17.75 (or to zero), report the
exchange of your shares for Federated shares, using Quicken's Corporate
Acquisition (stock for stock) screen. Your old basis will be allocated
among the Federated shares (including fractions) that you are entitled to
receive. If you are entitled to a fractional share, then record sale of the
fraction immediately AFTER the merger for the amount of cash you receive for
it. (We've never understood why Quicken asks for the price of the acquiring
company; it doesn't matter here.)
Remember that this is my GUESS, based on what little clues we have so far.
It is subject to revision as we learn more. You should consult your own CPA
when you have the documents from which a proper analysis can be made. I've
been retired for more than a decade and tax rules change daily.
When you have the answer, please post it - or a pointer to it - here because
I'm sure many other readers will also need to know.
(see the PS below):