Tax question on stock acquisition?

Question

I bought 1000 shares MBNA stock at $25 dollars back in july 05.

MBNA was acquired by Bank of America and the transaction completed in 1/3/2006. I received $4,125 in cash and 500 shares of BOA at $47.08.

How do I record this transaction for the IRS? On my 1099 form, only the $4125 was reported to the IRS. Do I have a cost basis of $25000, and hence a loss of $4125-$25000 = $20875?

Thanks for your help!

momzadork, thanks for your response.

I don't believe that calculation is correct, because my MBNA stock gain was not fully realized. My MBNA stock was transferred to BOA stock, with an additional $4.125 for each MBNA share (hence $4,125). This $4,125 was the amount to the IRS, I assume as a realized gain. So how do I treat the cost basis here?

Answer 1

Your cost or basis would be $12500 since your only talking about 500 shares because the the other 500 shares were put into another stock. To correctly figure the loss or gain you need to know how much the stock was worth per share when they cashed out the 500 shares. i.e. lets say they were worth $50 per share on transaction date
That would be 500*50= $12500 gain. I hope that makes sense if not you can call your local Liberty Tax and they will be happy to answer any questions. :)

Answer 2

The Liberty Tax response is definitely out in left field. Guess I'll add that to the list of "Tax prep mills I'd never do business with."

Judy and tma are both correct.

IRS Pub 550 (pages 46 & 47) covers this issue. If there was no cash involved there would be no gain to report; it would have been a non-taxable event. Since cash was involved, you have to report gain of "up to the amount of the money or other property" received.

It seems to give you some wiggle room with the wording. You could either report the entire $4,125 as gain and keep the original $25,000 as the basis for the 500 shares of BofA or treat it as a sale and purchase and pick up the lesser gain as stated by Judy and tma and use the new $23,540 basis from the BofA shares. Since that would cost you the least in tax (and potentially preserve the difference for long-term CG treatment) that's the way that I'd go too.

Due to the timing the gain is short term and is taxed at your marginal rate so you want to minimize the gain as much as possible and it looks like the rules give you the option to do so.

Answer 3

No, you definitely don't have a huge loss like you ask. And the relative number of shares is irrelevant.

I'd think the way of looking at it would be that you essentially sold the 1000 shares of MBNA for the BOA stock worth 23,540, plus 4125 cash, for a total of $27,665, for a total gain on the 1000 shares of MBNA stock of 2665 (basis $25K, sales proceeds $27,665).

Rob or Bostonianimo, are you out there to answer this one?

Answer 4

The gain you recognize is the lesser of
-cash received ($4,125)
-gain you would realize ($2,665) (see below)

You received $4,125 cash + 500 shs @ 47.08 which would be equal to a total value of $27,665. Your cost basis in MBNA was $25,000. So the gain here would be $27,665-$25,000= $2,665.

You would report a capital gain of $2,665. You would report proceeds of $4,125 and a cost basis of the difference, or $1,460.

Your adjusted basis in BOA is
25,000 original cost
- 4,125 cash received
+2,665 gain recognized
---------
23,540
div by 500 shs = 47.08

so you would use $47.08 as your cost basis when you sell BOA stock.