How to record corporate acquisition with stock and cash back

Cash is return of cap which reduces the cost of MHS shares BEFORE converting into ESRX.

If there are fractional ESRX shares you might have to make an immediate sale of the fraction.

I just received broker's notice on the same transaction:

1. You sold MHS for 28.80 per share plus 0.81 shares of ESRX on April 3
2. ESRX closed at 57.67 on April 3. MHS closed at 70.30 on Apr 2.
3. Per share MHS you received 28.80 + 71.20 (57.67 / .81) = 100.00
4. Fractional shares of ESRX were immediately sold.

I think it depends on when you want to take how much CapGain - ask your accountant: A. If 28.80 cash is return of cap then remaining total cost of MHS total cost of ESRX. This gets confusing for me as it would result in a negative total cost. B. If sale of MHS is 100.00 per share then ESRX cost is 0 CapGain is when ESRX is sold but immediate on MHS

I looked at this item, thought about it for a while and then saw the original response. It was so much simpler, but it's wrong.

First you have to get the fair market value of the acquiring stock on the day you receive it. Then use a sell transaction to a portion of your shares in the acquired company. Compute that portion by dividing the amount of cash received by by the sum of the cash received and the value of the new shares received.

The recompute the number of new shares per old share so that it will result in the same number of new shares you would get if all of your shares were converted, not just the remaining shares.

Of course all transactions relating to this should be entered as Total Dollars and Shares, NOT on a per share basis.

I noticed that my broker has entered the ESRX at zero cost and will use that to report subsequent sales gains per the new IRS rules. Therefore, until that is changed, in Quicken I will enter on April 3:

1. Sell all MHS for the total cash received = immediate CapGain.
2. Add ESRX 0.81 x MSH shares at zero cost.
3. Sell fractional ESRX. FYI: my 0.04 shares sold for .29 = .25 per share

Note that when running 2012 CapGain Report fractional will be Short Term when it probably should be reported as Long Term if MSH was purchased before April 3, 2011.

If you haven't already, I'd consult a CPA. I know brokerage houses are under new cost basis rules & "maybe" they've gotten it together, but in years past, brokerage houses don't always get it right. If the effective date of this xctn precedes when the new rules went into effect, I'd be especially wary of the brokerage statement numbers.

Case in point, the initial guidance for the PFG demutualization was that the shares would have a cost basis of $-0-.

It's been long enough that I don't remember the exact figures, but in the end IRS clarification stated that the cost basis would be based on the market value as of the date we received the shares.

Hi, Jo.

Just wait for a few days. Express Scripts' management should very shortly publish a detailed description of the legal form of the transaction. Until then, all you have are guesses based on press releases and other informed - but unofficial - statements.

Unless ESRX structured the transaction to qualify under some specific section of the Internal Revenue Code, the "merger" (actually a purchase, it appears to me) would fall under the general rule that any sale or exchange of property is a taxable transaction. Any gain would be recognized just like a cash sale of your Medco stock. The sale price would be the total of the cash and the FMV (Fair Market Value) of ESRX stock or anything else that you received. There are several ways to determine the FMV of marketable securities; it all boils down to informed opinions - and everybody has one of those. To avoid any later argument with the IRS, it's probably safest to wait until ESRX management publishes its opinion of FMV at the close of the transaction.

For planning purposes, you might estimate your gain or loss by using the figures in this press release:

79001&highlightThe key paragraph there says:"Financial Considerations "Following consummation of the acquisition, each share of pre-closing Medco common stock was converted into (i) the right to receive $28.80 in cash, without interest and (ii) 0.81 shares of common stock of the new Express Scripts, a holding company which will own 100% of each of the existing Express Scripts and Medco, and each share of the pre-closing Express Scripts common stock was converted into one share of new Express Scripts common stock."

Using those numbers, plus your statement that you received $5,760 cash, I assume that you held 200 shares of MHS. You would have received the cash plus 162 (200 * 0.81) shares of ESRX. Zaidy036 said that his/her broker reported that "ESRX closed at 57.67 on April 3"; since I don't have another FMV for ESRX, I'll use that in this example - but it is subject to change when an official determination is made. Using that value, your total sale price was 162 * $57.67 = $9,342.54 + $5,760 = $15,102.54.

You haven't said when or how you acquired your MHS shares. You will recognize capital gain or loss on each lot, and it will be long-term or short-term, depending on the holding period for each lot. To keep it simple, let's assume you bought all 200 shares of MHS at $50, for a total of $10,000, on January 1, 2010. You would report $5,102.54 long-term capital gain. Your basis in your new ESRX "new Express Scripts common stock" shares would be $57.67 per share and their holding period would begin on the merger date, 4/2/12.

You can record and report the disposition of your MHS shares as a simple sale transaction, just as though it had been for all cash. There's no need to currently report the acquisition of your ESRX shares, just as you probably did not report the purchase of those MHS shares when you bought them; sales generally produce taxable events, but purchases usually do not.

Obviously, these amounts need to be replaced with the actual numbers when they are available. And be sure to carefully read any statements from ESRX as to any special tax considerations that we might not yet know about. Please report back in a week or so when the official version of the transaction is available.

And remember, Jo, I've been retired for over 20 years and tax rules change daily, so be sure you consult with a CPA or other competent - and current - tax advisor.

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 5 and Windows Live Mail in Win7 x64)

ESRX just recently bought MHS, giving me 81% of my original MHS shares and about $5760 cash. I can't figure out how to enter that type of transaction in the investments area. The option for corporate acquisition doesn't have anywhere to enter the cash I'm getting. I can use that option to record the stock portion of the deal, but what do I do with the cash portion? I think I need to treat it as a single transaction somehow, in order to keep my cost basis and capital gain tax (I'm told) on the cash straight, but I don't see how to do that in Quicken. Any ideas?

jo

Hi, Jo.

On further reflection...

Even before your latest post, I realized that, yes, this is a true merger because MHS shareholders have a continuing interest in the ongoing business. So my interpretation of it as a sale/purchase is probably wrong.

Right. A ROC would have come from the MHS treasury before the merger. But maybe it did; we won't know until we see the exact step-by-step structure of the transaction. My big library wall of black tax references retired when I did and I'm no longer good at online tax research. My quick search for "corporate mergers with cash back" didn't turn up anything promising. And I've never used the new Form 8949 at all.

My first suggestion (wait for a few days) and my last one (check with a current CPA) still seem like good ideas. Often a company's attorneys and accountants will publish a worksheet guiding shareholders through the transaction. Watch the ESRX website and its Investor Relations pages for such guidance. When you see something like that, please post the URL here so that we can read it for ourselves. Something in it might jog my memory - or I'll learn something new! ; Hi, Jo.

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