Cash in lieu of fractional shares

In article , snipped-for-privacy@aol.com (NadCixelsyd) writes: | Say I own 200 shares of ABC with a cost basis of $3333.33. Due to a | merger, those 200 shares of ABC are exchanged for 301.45 shares of | XYZ. My basis in XYZ would be $11.05765 per share. | | Assume XYZ is selling for $40 at the time. Since shares are only | integers, I get 301 shares of XYZ and $18.00 cash in lieu of the 0.45 | shares. What's my basis for the $18.00 cash sale and what's my basis | for the 301 shares of XYZ? | | I've always assumed that everything is apportioned: My 301 shares | have a basis of $3328.35 and I have a profit of $13.02 ($18.00 - | $4.98) for the cash-in-lieu.

That's what I always assumed as well.

| My broker reports the $18.00 as a sale with zero basis on my monthly | statement. They then keep the entire $3333.33 as the basis for my 301 | shares of XYZ on monthly statements going forward.

And that's what Fidelity has been doing for me lately. My initial thought was that they might know best and that it would be a bad idea to take a position that contradicted theirs. However, now that they are (supposedly) computing basis on fixed-income securities I have to wonder just what their strategy is. It appears for munis that they take premium into account (in the most tax-pessimistic way) while ignoring accrued OID. Thus their approach could be characterized as "maximize current taxes" (which is probably safe for them). Since they won't provide details of how they calculate basis it's hard to tell.

Dan Lanciani ddl@danlan.*com

Only if you purchased all 200 shares of ABC at the same price.

Otherwise, you allocate the basis of each lot of ABC purchased at the same time and at the same price to the prorated number of XYZ shares.

For example, suppose you bought ABC in lots of 50 for $750 ($15/share), 100 for $2000 ($20/share) and 50 for $583.33 (about $11.67/share).

Then you would divide the 301.45 shares of XYZ into the following corresponding lots (each with the ABC purchase date): 75.3625 shares [301.45 * (50/200)] with $750 basis (about $9.95/share), 150.725 shares [301.45 * (100/200)]with $2000 basis (about $13.27/share), and 75.3625 shares [301.45 * (50/200)] with $583.33 basis (about $7.74/share).

Again, only if you purchased all 200 shares of ABC at the same price.

Otherwise, the cash-in-lieu is for shares sold in FIFO order. So having allocated the basis per above, you sold 0.45 shares from the first lot with a basis of 0.45/150.725 of $750 -- about $2.24.

So your Sched D profit would be $15.76 ($18 - $2.24) less any cost for the cash-in-lieu transaction. (I have never heard of any. I'm just mentioning it for completeness.)

Also, you would decrease that lot of XYZ shares to 150.275 (150.725 - 0.45), and you would reduce that lot's basis to $747.76 ($750 - $2.24).

That is a common practice. You have the choice of ignoring that and doing the "correct" thing. Or you could simply follow your broker's practice, especially if you have a written statement to that effect.

If you go the zero-basis approach, be sure to adjust the arithmetic above. That is, allocate 301 shares of XYZ to the various lots, and keep the full original basis with each lot.

The acquired company should tell you how to handle the cash in lieu. The amounts are usually not large. I'm surprised at your (broker's) statement, because my recollection is that cash-in-lieu associated with the acquisition of Lucent Technologies (years ago) was officially treated as a reduction in cost basis of the remaining shares (i.e. taxes deferred).

Brokerage houses are not always right, and you can provide the IRS with a reconciliation showing the correct numbers and the basis for those.

1099 B $1,018 Less: Cash in lieu $18 Total sales $1,000 Cash in lieu carried forward as reduction of cost basis $18. (Copy of company notification to shareholders enclosed.)

Then reduce your cost basis as appropriate and carry it forwards, reporting the reduction on the date of sale.

No, it wasn't, if you are referring to the Alcatel-Lucent merger.

To refresh your memory, go to the Investors Tax Basis Worksheets link at

-- specifically the worksheeet at

(I hope that link survives the moderator's posting filter.)

Theirs is a much simpler example than the one I presented -- a single purchase lot. But you will see that the cash-in-lieu is handled exactly as I described.

They computed the per-share basis in a manner similar to what I did. (I prefer to work with fractions of the total basis.) Then, following their step numbers:

1. .37 New tax basis per Alcatel-Lucent share 8. 0.52 Fractional share received 9. $ 7.99 Multiply fractional share by new tax basis (#8 * #7)
2. $ 6.91 Amount of fractional share check received
3. $ 7.99 Tax basis for fractional share (#9)
4. (.08) Subtract fractional tax basis from fractional check amount (#10 - #11)
5. (.08) Gain (loss) frmo fractional sale (#12)

In my previous response, I said, "No, it wasn't". Well, it certainly wasn't "taxes deferred".

But as to a "reduction in cost basis of the remaining shares", you and I might be in "violent agreement", depending on exactly what you meant.

Interestingly, the Alcatel-Lucent Tax Basis Worksheet that I referred to previously fails to say what effect, if any, reporting the gain (loss) from the "fractional sale" (their words) has on the total tax basis of the remaining shares.

But yes, as I mentioned previously, if you report the gain (loss) from the sale of fractional shares (cash-in-lieu), the basis of those fractional shares do reduce the __total__ basis of the remaining whole shares -- just as any sale does.

To refresh your memory again, it might be helpful to show how the Alcatel-Lucent Tax Basis Worksheet computed the total and per-share basis. It should sound familiar ;-), referring to my previous explanation.

1. 100 Number of Lucent shares owned (single purchase)
2. $ 3.00 Tax basis per Lucent share
3. 0.00 Total basis of Lucent shares
4. 19.52 Total Alcatel-Lucent shares received (#1 * 0.1952)
5. 0.00 Total basis of Lucent shares (#3)
6. $ 15.37 Divide total basis by number of Alcatel-Lucent shares (#5 / #4)
7. $ 15.37 New tax basis per Alcatel-Lucent share

Their worksheet fails to explain that $300 is also the total basis of the 19.52 shares of Alcatel-Lucent shares, which includes the 0.52 fractional shares. That should be obvious (see step #6), but perhaps not to some people.

Since $300 is the total basis of 19.52 shares, and 0.52 shares are reported sold with a computed basis of $7.99, the basis of the remain 19 shares is $292.01 (300 - 7.99).

And yes, to that extent, reporting the gain (loss) from the sale of the fraction shares (cash-in-lieu) does indeed result in a "reduction in cost basis of the remaining shares" -- as I explained previously.

Nothing particularly magical about that, which is probably why it was not explained in detail in the worksheet.

HTH.

Oops. Just to clarify, I didn't mean to disagree or invalidate your computations for the proprtional cost basis. Perhaps I was thinking of some other merger. The Lucent-Alcatel pdf file wouldn't open for me (perhaps a download only), but the AT&T spin-off of Lucent (1996) material contains this quote as regards the fractional share portions:

"The taxable gain or loss that must be recognized for income tax purposes will be equal to the difference between the cash received and shareowner's tax basis in the fractional share (you can determine your tax basis using the worksheet that follows)."

So again, not an intent on my part to question what you posted, and thank you for your clarification.

Also, bear in mind that the monthly statement is one thing, but the 1099-B form is another.

Most likely, the broker won't report the $18.00 as a capital gain on form

1099-B. But if they do, it's more of a hassle for you to keep your records differently. The IRS gets copies of the 1099s. So if something is reported on 1099-B, I try to have a corresponding line on Schedule D (Form 1040), which seals the issue of how to track the amount from then on. There are various reasons, though, why something might appear on Schedule D but not on a 1099, this being one of them.

(Disclaimer: I'm not a tax pro.)

The 1099-B reports sales proceeds (gross or net commissions and fees, at the broker's discretion), not capital gain (loss) or basis. Even though brokers send us ad hoc 1099B's that might contain ancillary information, I believe they must use the official red scannable 1099-B to the IRS.

(Before you point to Box 8, be sure to understand what it is for.)

So if something is reported

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Thanks for your assistance.