how to enter stock purchase of Phelps Dodge by Freeport McMoran

Hi, Edward.

A Google search for "freeport-mcmoran" quickly turned up

There's a lot of news about the Phelps Dodge acquisition there, but what you need is on the Investor Relations link, then Shareholders FAQs This has a description of the transaction that is complete enough for your use in recording it in Quicken. The effective date is reported as March 19, 2007, not March 21. Many corporate acquisitions are structured as mergers and are carefully tailored to qualify under the tax rules as "tax-free" transactions. Actually, they are only "tax-deferred", because the shareholder's old basis carries over so that any gain is simply deferred until such time as the new shares are sold. Quicken 2007 provides for recording such as a transaction as a "Corporate Acquisition (stock for stock)". But that does not fit the FCX acquisition of PD.

The FAQ says specifically, under "What are the tax consequences for former Phelps Dodge stockholders?", that "The receipt of the merger consideration for holders of Phelps Dodge common shares pursuant to the transaction will be a taxable transaction for U.S. federal income tax purposes." This means that you will report the transaction as the SALE of your PD stock on

3/19/07, just as if you had received ALL cash for it. And you will report your receipt of FCX shares as if you had paid cash for them on 3/19/07. The company is reporting the value of the FCX shares you received as $61.59 per share, or .67 * $61.59 = $41.2653 for each share of PD you sold. This value plus the $88 cash = $129.2653 is the selling price for each share of your PD stock.

So you will Enter the transaction as a simple "Sell - Shares Sold". Report the sale on 3/19/07 of all your PD shares at $129.2653 per share (rounding as appropriate), just as if you had sold them all for that much cash, recognizing long-term or short-term capital gain or loss, depending on your holding period and basis in the PD shares. Then Enter a "Buy - Shares Bought" transaction on the same date, reporting the purchase of your new FCX shares at $61.59 per share.

If you were entitled to a fractional share of FCX, you would receive cash for that fraction at $60.71 per share, and you would report that small sale, too. In other words, if you held only 1 share of PD, you should receive $128.68 ($88 + .67 * $60.71) cash - and no FCX stock - for it; you would simply report that sale for cash.

I've been retired for more than a decade, Edward, and tax rules change daily, so be sure to check with your own CPA to be sure of the proper reporting on your tax return.

RC

As a fundamental operation (but not as a fundamental business transaction) the accounting of the company acquired is a...stock split. In other words you begin with a number of shares and you change to a different number of shares. And the basis has not changed, the holding period has not changed, and there is no capital gain or capital loss. See it's a stock split OPERATION...but the ticker symbol did change or does change or should change...

But the cash received is a return of capital. The return of capital does or should lower the cost basis and the return of capital is also a deposit not a dividend.

Oh, according to White's quote from a FAQ it's a taxable transaction. If true then it's a sale at the merger value and then a buy at the stock received value...

Thank you very much RC! I don't understand why it would be treated as a sale, rather than an acquisition or merger. I tried to find the joint proxy statement which addresses the tax consequences in more detail, but I haven't had any luck yet.

Hi, Edward.

See below...

Hmmm... I can't find that proxy statement, either. I expected it to be there when I clicked SEC Filings on the Investor Relations page, but I can't spot it there, even with a Search. :>(

But the tax code generally refers to gain on the "sale OR EXCHANGE" of assets. In other words, the starting assumption is that any exchange is the equivalent of a sale and a purchase. The selling price is the Fair Market Value of whichever exchanged property can be determined more easily and accurately. And the same amount is the purchase price of the acquired property.

Any exchange is fully taxable unless excepted by some specific section of the Internal Revenue Code - and there are many such exceptions. One is the familiar exchange of "like kind property", such as when we trade in our old car for a new one.

Another is the exception for a merger of two corporations. But this one must be carefully structured by the acquiring corporation to qualify under the very strict provisions of the IRC. If it doesn't so qualify (intentionally or not), then the transaction is taxed under the general rule: fully taxable.

There are many possible reasons why FCX might prefer this acquisition to be taxable. My guess is that the reason is to have FCX get a new, much larger tax basis for all the assets that PD owned, especially the natural resource reserves, production equipment and other assets. In a merger, the old bases carry over, since the theory of a merger is that ownership hasn't changed; the former owners of both companies still own both companies, just in a different form, so there is no reason to change the bases of the underlying assets. But when a company BUYS assets. either a piece at a time or all in a bundle by buying and dissolving the entity that owns that bundle, then the basis of each asset is the price paid for that asset. (It's a lot of work for accountants to allocate the purchase price among all those individual assets, but it can and must be done.)

The choice of tax-free or taxable transaction is made by the two companies' managements - with or without a vote of the shareholders - and the shareholders of the selling corporation are bound by that decision. (The buying corporation's shareholders are bound, too, but they have no transaction to record at this point either way. For them, it "just happens".)

RC

Here it is...

Ira Smilovitz

Thanks again RC. I did not know a company would have a choice as to whether or not a transaction should be treated as a sale. Thank you for your in depth explanation.

Edward

Thanks IRA. I didn't think of going directly to the SEC, and I'm not sure I could have found it if I had thought of it!