Form 8937 Report of Organizational Actions Affecting Basis of Securities

Now that April 15 rush is over, I hope someone will answer these questions:

I owned an ADR of a foreign company ("FC"). The FC did:

A. a reverse stock split 13:12, B. change the nominal value of the common shares from $0.30 to $0.01; and C. made a distribution of $x/new shares

On line 15, it states "...aggregate new stock basis will generally equal the old basis plus gain, less cash received (but old basis and gain must be determined by each individual shareholder). Generally, new basis should be allocated amongst the shares received in a way that reflects the basis and holding periods in the shares surrendered."

On line 16, it states "We believe that in most cases, the transaction will not result in an aggregate tax basis adjustment, i.e., in those cases in which the resulting gain is greater than the cash distribution. However, if the cash received exceeds the gain, the new basis would likely decrease (i.e., only the gain and not the cash amount would be added).....The FMV on the transaction date (March 27, 2014) date was approximately $14.21."

Line 17 lists the applicable IRC as "IRC sec. 36B(a)(1)(E), 354, 356, and 358; also, generally, basis allocation should be carried out per Treas. Reg. 1.358(a)(2)(i)".

Questions:

  1. What is the "gain" mentioned in Lines 15 & 16 -- the difference between the FMV of the new shares on 3/27/2014 and the basis for the old shares? But I don't think so -- in view of the statement on line 16 "...in most cases, the transaction will not result in an aggregate tax basis adjustment...." -- different shareholders would have different purchase price and therefore the the "gains" cash received (a flat $/share payment).

So, what is the "gain" in this case?

  1. The payment/distribution for this transaction in C. above is clearly not a dividend (no withholding tax was deducted). But the 1099-DIV I received shows it as a Qualified Div. The brokerage firm tells me that is because it was reported to them as a Dividend; and they can't change it unless the FC changes it.

So how should this payment be classfied -- 1099-B ? And does the FC need to amend their report to the brokerage firms?

  1. A side question. Who makes the w/o tax deduction -- the transfer agent? Or the financial institution that holds the ADR for the investor? Or some other entity? [One brokerage firm tells me they do the w/o; while another firm tells me the company does.]

TIA

Reply to
Not A Clue
Loading thread data ...

Without knowing the company and reading through any documentation they provided, any answer would only be a guess. That said, here is one way this might be treated. Assume you held 13 old shares. You surrender them for 12 new shares. The change in nominal value is irrelevant for US tax purposes. Since you received a whole number of new shares for your old shares, your aggregate cost basis is unchanged, but the cost basis of each new share is 13/12*(old cost basis).

Assume instead that you owned 100 old shares. You would receive 92.31 new shares. Instead of the 0.31 fractional share, you probably received some cash. You would have a gain/(loss) based on the difference between the cash received and the cost basis associated with the 0.31 new share which is 0.31/92.31*(aggregate old cost basis). Your cost basis in the 92 new shares you now own is (aggregate old cost basis)-(cost basis for 0.31 new share).

However, since this is a foreign company, many of the US tax code provisions that could lead to part or all of this transaction being tax-free may not apply. You really have to review the specific documentation to be sure.

I don't know why you think that there needs to be income tax withheld from this transaction. Presence or absence of withholding doesn't characterize what type of transaction it is, nor its ultimate tax treatment.

As to question 2, the broker reports what it is told by the company. It's your responsibility to make sure the reporting is correct and to make any necessary adjustments.

As to question 3, it depends on the specifics of the tax treaty, but most often any foreign tax withheld is withheld by the company before the dividend is transferred to the US. In some cases (Canada comes to mind with regard to certain types of payments), the tax is paid by the listed owner (which would be the broker if held in street name) via a tax return it prepares for the foreign country, and then the broker passes along your share of the tax liability.

Ira Smilovitz

Reply to
ira smilovitz

I am trying to reply to Smilovitz's response. But when I click on Post Reply in Smilovitz's message, all I see quoted here is my original post. Anyway, this is a reply to Smilovitz's response.

The company is Ahold, a Netherlands co. In conjunction to the reverse split 13:12, it also made a payment of $x/new share. And on Form 8937, lines 15 & 16, it mention possible gains (I assume it would capital gains):

This is the part that I don't understand. I thought the distribution would be Return of Capital. How do I determine whether I have any gains?

The company's response is:

"For US shareholders, the transaction should be treated as a recapitalization with boot and should qualify for dividend treatment. The actual cash received should be the maximum amount subject to tax. The amount subject to tax may be lower depending on the specific circumstances of shareholders (e.g., in cases of little or no appreciation in their shares)"

TIA

Reply to
Not A Clue

I'm surprised at the paucity of available documentation on this split. It appears as though the 8937 is the only US document - no SEC filings. As you've realized, the explanation in the 8937 leaves much to be desired.

Here's my best guess as to what happened and how it is treated. The details appear to be in the references listed on line 17. I'm not familiar with the details of these IRC sections and related regs, but it appears that the first step is to compare the total value of what you received (new stock including fractional shares and cash dividend) to your cost basis in the old shares to determine gain or loss. If a gain, you are taxed on the lesser of the gain or that portion of the cash which is not designated as a dividend. Since all of the cash was received in the form of a dividend, there should be no taxable gain and your aggregate cost basis in new shares (including fractions) is the same as your aggregate basis in the old shares.

If the total value of what you received (new stock including fractional shares and cash dividend) is less than your aggregate cost basis in the old shares, you have a non-recognized loss and you must lower your aggregate cost basis in the new shares (including fractions) by the amount of the loss.

Once you determine your aggregate cost basis in the new shares (including fractions), you "sell" the fractional shares for cash-in-lieu. You reduce your aggregate cost basis by the amount of basis allocated to the fraction. Any gain or loss is ST/LT based on your holding period of the old shares.

Ira Smilovitz

Reply to
ira smilovitz

The payment in conjunction with the reverse split is not a dividend. [The company paid its regular dividend a month later -- with w/o tax deducted. And this payment had no w/o tax deducted; and Lines 15 & 16 mention gains.]

According to the Company: "..the transaction should be treated as a recapitalization with boot and should qualify for dividend treatment..." This is a capital transaction? If yes, is boot taxed as capital gains? Or as dividend?

I don't know what the Company means by "dividend treatment". May be they are thinking of the tax rate?? Dividends and LT Capital gains are taxed at the same rate. But when I plug the number in TurboTax, I save a few $ if I input that payment as a Capital Gain.

[My capital Gain/Loss swings from a loss (payment as dividend) to a gain.]

TIA

Reply to
Not A Clue

You are living up to your posting name. The payment with the recapitalization is a dividend and it gets dividend treatment. See the relevant sections of the Internal Revenue Code.

Ira Smilovitz

Reply to
ira smilovitz

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.