How to recognize an unusual transaction
Most transactions, such as mergers, spinoffs, and stock splits, are non-taxable. Sometimes, these transactions have certain characteristics which make them either partly or fully taxable. Here's how to tell the difference between a normal transaction and an unusual transaction.
A Treasurer can enter a normal transaction using the instructions in the manual or in the software's help section. Unusual transactions require additional instructions that may be specific to that company.
There is no boilerplate solution for all transactions. ICLUBcentral posts how to handle these transactions on our web site at https://www.myiclub.com/faq/category.aspx?id=3. If the transaction you are attempting to enter appears unusual and is not listed there, contact ICLUBcentral Technical Support, and we will consult our staff accountant for the best way to handle it.
So, how can you tell the difference between a normal transaction and an unusual transaction? Check your broker's statement, then check the company's web site. Even if it passes the first test, don't stop at the broker's statement. ALWAYS go to the company's Investor Relations and find out for certain. Here's what to do:
Test One: The Broker Statement
On the broker's statement, did you receive more cash than you could get for selling one share of the stock? In a normal transaction, the only cash you get comes from the sale of a fraction of a share. For example, in a 1:2 reverse split, you start with 11 shares and end up with 5.5 shares. The broker sells off the 0.5 share for the price that day, $15.00. You get 5 whole shares and $7.50 cash-in-lieu. If your broker statement for the transaction instead reported that you received $55 (much higher than the stock price that day) plus $7.50 cash-in-lieu, that's an unusual transaction. This extra cash is partly or fully taxable, and must be handled properly.
Test Two: Investor Relations
Go to the Investor Relations section of the company's web site. If the company website has information about the transaction, your search is probably over. If not, and if there is another company involved, check the website for that company.
Learn the particulars of the transaction. If stock is involved, find out how many shares of Company A or Class B are being exchanged for Company B or Class C. If additional money is involved, find out how much you should receive per share, in addition to cash-in-lieu of fractional shares. Sometimes, this information is missing and the website will give you a link to documents filed with the SEC. It can be a little daunting to follow the SEC link to the correct spot. You are looking for a S4 document, the date will be closer to the announcement date than the transaction date.
The introductory pages of the SEC report should tell you the details of the transaction, including the taxability. Search for "federal income tax consequences". Read these items carefully, since they will give you the best insight as to whether or not this is a normal, non-taxable transaction, a partly taxable transaction, or a completely taxable transaction.
If your research shows that this is a non-taxable transaction, it is a normal transaction, and you should enter it by the book.
If you are dealing with a merger that is partly or fully taxable, it likely falls into one of two categories.
a) It may be completely taxable. In that case, sell all of your old stock for an amount equal to the total of the cash received, plus the fair market value of the shares of the new stock. After recording this sale, enter a purchase of the new stock at that fair market value price. The Guidant-Boston Scientific merger is an example of this type of transaction. See http://www.iclub.com/support/kb/default.asp?page=kb_1083
b) It may be partially taxable, which we call a "Merger with Cash". Compute the total merger consideration, consisting of the cash received plus the fair market value of the stock received. Next, deduct your cost basis in the old [merged] company from that total consideration to get your Total Gain. Your Reportable Gain will be the lesser of the Total Gain or the cash received.
For completely taxable spinoffs, treat the shares received as a taxable dividend. Enter the fair market value of the stock received as a dividend against the original company, then a purchase of the new company shares at the fair market value.
Stock splits are almost always non-taxable. The one exception we have found is if you have received stock of a different class (Class A, Class B, etc). If, after analyzing the information at the company website, you determine that this is the case, enter a dividend for the fair market value of the stock received, followed by a purchase of those shares.
There is no single guide that can give you a definitive answer on how to treat every type of unusual transaction. Read your broker statement carefully, review the Investor Relations section of the company's web site or the SEC filings, and visit our list of unusual transactions at http://www.iclub.com/support/kb/default.asp?page=transactions.