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Q2016 Windows: How do I record the Analog Devices Inc cash and stock Acquisition of Linear Technolo

tvicki
tvicki Member ✭✭
edited February 2019 in Investing (Windows)
I'm using Quicken 2016 Home & Business (on Windows).

I see the following: "In connection with the closing, Linear Technology stockholders will receive $46.00 in cash and 0.2321 of a share of Analog Devices common stock per share of Linear Technology stock. Following the closing, Linear Technology shares will be delisted from trading on NASDAQ Global Select Market."


I have/now had 800 shrs Linear Technology (just 1 Lot). Thus $46 x 800 shrs = $36,800 and I have received it (showing 3/14/17 saying effective 3/13/17 on my transactions online w/Schwab).
And .2321 x 800 shrs = 185.68 shrs Analog Devices and i have received $56.22 cash in lieu of the .68 shrs.

My broker, Schwab, is showing the $36,800 as a Long Term Gain with 0 as the Cost Basis on the 800 shrs of Linear Technology. I didn't know how to record that so I have entered it as a Long Term Capital Gain Distribution (on the screen for dividends and/or interest...).

My real Cost Basis on the 800 shrs of Linear Technology acquired 1/20/1998 is $12,780.80
I did a Corporate Acquisition: dated 3/13/17 w/Linear Technology being acquired by Analog Devices, put in the .2321 where it asked for how many new shrs was received for each old shr (or something to that effect) and it also asked for new price after acquisition which I wasn't sure of and I put in $82.20 which actually was the closing price of March 10 as I had read somewhere that the deal was completed March 10, 2017, (maybe I s/h/used $82.95, the high + low divided by 2). The Acquisition Removed the 800 shrs Linear & Linear shows w/ 0 gain and it Added Shares 185.68 shrs Analog Devices and has the 3/13/17 date of when it added shrs and it also has the 1/20/1998 for tax purposes and it has the correct Cost Basis of $12,780.80

I enter the transaction to sell the .68 shrs receiving $56.22 and ended correctly w/ cost basis of $46.81 and Long Term Capital Gain of $9.41

And of course the Cost Basis of the 185 shrs of Analog Devices has decreased correctly by the $46.81 to $12,733.99 ($12,780.80 - 46.81 = $12,733.99).

So apparently by broker/custodian Schwab considers the $36,800 all Capital Gain and the Analog Devices shares received take on just the Cost Basis of the Linear Technology. I hope I'm tying to do this under the right assumption. I did check w/my Investment Advisor and she did say that Schwab had recorded it correctly.

I wish there was a better way to record the $36,800. I don't think the Long Term Capital Gain Distribution is right. The $36,800 should show up on the Capital Gains/Losses report.

Is there anything simple I can do to change this?
Or is what I did the correct way to handle it?
Is there or what is the Internal Revenue Code/Reg that may apply to this?

Comments

  • q_lurker
    q_lurker SuperUser ✭✭✭✭✭
    edited May 2018
    In this type of transaction, the cash received might be all capital gains, partly capital gains, or not capital gains.  It depends on what price you paid for your shares, on the fair market value of the shares you received, and on the total value you received.  

    The first step is to identify the fair market values of the shares you received immediately after the merger. You can look at trading values on that date (March 13, 2017), at information from your brokerage, at an IRS Form 8937 that the company will someday publish, or other sources of information.  I looked at Google finance and saw for March 13, trading values for ADI as follows:
    Open 82.24
    High 82.33
    Low 81.31 and
    Close 82.76. 
    For demonstration purposes, I am going to use the average of the open and close prices and say the FMV for the ADI shares you received was 82.50/share

    With that established, everything else is represented in the spreadsheet excerpt below.  

    image 
    If the Linear shares were bought for less than $19.148/share, then all the cash received is treated as current capital gains.  If the Linear shares were bought for more than $65.148, then none of the cash is treated as current capital gains.  In between those two values, some is cap gains, some is not.

    In your case, your basis is below that threshold, so your brokerage is correct, all the 36,800 cash received is going to be reportable on your 2017 tax return as capital gains and your newly received ADI shares should take on the basis of your Linear shares.  

    In Quicken for your case:
    • I would sell your 800 Linear tech shares for $49.580.80.
    • I would then buy 185.68 shares of ADI for $12,780.80 leaving $36,800 as cash in the account.
    • To get the acquisition date correct, I would then enter a Remove Shares transaction for the 185.68 ADI shares followed by an Add Shares transaction again for 185.68 shares of ADI with a basis $12,780.80 and an acquisition date of 1/20/1998.
    • Finally, I would sell the 0.68 shares of ADI for the $56.22 cash-in-lieu amount you received.  
    Using a FMV different than $82.50 for the ADI shares will alter the two derived values slightly, but not enough to affect your situation.  Overall, I agree with what Schwab and your financial adviser have told you.  Pretty much, the only difference between your approach and mine would be how the $36,800 shows up in long-term cap gains.  Those statements may not apply to other investors holding shares at different basis values.     

    As a sidebar comment, some investors complain mightily about that cash being treated as capital gains.  ADI valued the shares of Linear Tech at close to $65/share.  Had you sold those Linear shares a week ago, two weeks ago, ..., you would have had the same capital gain liability associated with getting rid of those shares.  In reality, ADI simply forced your hand on the timing and to an extent dictated the value.  But if the shares had really been more valuable, the market would have stepped in.  You made a pretty good investment 20 years ago. Now (next year) it is time to pay the piper.  

    The other consideration to keep in mind as that you also now have 185 shares of ADI at a basis of about $68/share trading at $82/share.  I'll stay out of any conversation as to whether you should sell, hold, or buy more ADI.   

    HTH
  • tvicki
    tvicki Member ✭✭
    edited April 2017
    Oh my. I was not alerted that you responded 2 weeks ago! In the past I've always received an email every time someone responds to a question I have asked or am following. I must have something set wrong somewhere although I thought I had double checked that. I came back into this question as Schwab has changed the capital gain/loss on this. I'll write more shortly.
  • tvicki
    tvicki Member ✭✭
    edited April 2017

    Schwab (custodian/broker) has made some changes and is now showing:

    800 shrs Linear Technology CoXXX w/Close Date 3/14/2017 w/proceeds of $52,202.16 and Cost Basis of $12,780.80 and thus $39,421.36 Long Term Capital Gain (I purchased Linear 1/20/1998).

    The fractional .68 shrs Analog Devices Inc w/Close Date 3/15/2017 w/proceeds of $56.22 and Cost Basis of $56.41 and $0.19- Short Term Capital Loss.

    And the 185 shrs Analog Devices Inc w/Open Date 3/14/2017 w/Cost Per Shr $82.95 and $15,345.75 Cost Basis.

    My Investment Advisor (separate from Schwab) reached out to the company and found the following:

    The following statement comes from the
    proxy published prior to the merger:

    U.S. Holders

    The receipt of
    cash and shares of Analog Devices common stock in exchange for shares of Linear
    Technology common stock pursuant to the merger will be a taxable transaction
    for U.S. federal income tax purposes. A U.S. holder generally will recognize
    gain or loss for U.S. federal income tax purposes in an amount equal to the
    difference, if any, between (i) the sum of the cash and the fair market
    value (as of the effective time) of the Analog Devices common stock received
    pursuant to the merger and (ii) such U.S. holder’s adjusted tax basis in
    the Linear Technology common stock surrendered in exchange therefor. Such gain
    or loss generally will be capital gain or loss, and will be long-term capital
    gain or loss if the U.S. holder’s holding period for such shares exceeds one
    year as of the date of the merger. Long-term capital gains for certain
    noncorporate U.S. holders, including individuals, are generally eligible for a
    preferential rate of federal income taxation. The deductibility of capital
    losses is subject to limitations. If a U.S. holder acquired different blocks of
    Linear Technology common stock at different times or at different prices, such
    U.S. holder must determine its tax basis, holding period, and gain or loss
    separately with respect to each block of Linear Technology common stock.

    A U.S. holder’s
    tax basis in the Analog Devices common stock received in the merger will equal
    its fair market value as of the effective time. A U.S. holder’s holding period
    for the Analog Devices common stock received in the merger will begin on the
    day following the effective time.

    The Fair Market Value of the Analog Devices shares
     was determined to be $82.95.
    Hence, the new Schwab figures apply.

    800 LLTC X .2321= 185.68 [email protected] 82.95= 15,402.16+cash $36,800=
    $52,202.16 Total Proceeds.

    Proceeds $52,202.16- Cost$12780.80= Your Long Term Capital Gain of
    $39,421.36.

    New stock received cost basis is the Fair Market Value of
    ADI.

      185 shares at $15,345.75and .68 share at $56.41. You received
    $56.22 for the fractional share, hence the $0.19 loss.

    --------------------------------------------------------------------------------

    The $82.95 per shr appears to be from March 10, 2017, the High of $83.87 and the Low of $82.03 = $165.90 divided by 2 = $82.95

    I'm not sure about "as of the effective time" and about "will begin on the day following the effective time". I think the "as of effective time" is 3/10 or before 3/13 starts BUT Schwab has EFF 3/13 w/Close Date of Linear 3/14/17 and Open Date of Analog 3/14/17. I'm not sure I understand it and have a question in to my Investment Advisor about it.

    Thus I entered the following in Quicken (just not sure if it should be 3/13 or 3/14 and I currently entered 3/14/17 but I think I can easily change it to 3/14 if required):

    Sell all 800 shrs Linear Technology Corporation for $52,202.16 Total Proceeds ($65.2527 per shr)

    Buy 185.68 shrs Analog Devices Inc for $15,402.16 ($82.95 per shr)

    Sell fractional .68 shrs Analog Devices Inc for $56.22 Total Proceeds

    The above matched the dollar amounts that Schwab has.

    q.lurker I appreciate all the work you did 2 weeks ago including the spread sheet. Does what I've now done look correct w/the new info?  I'll post the link to the proxy in a minute.
  • tvicki
    tvicki Member ✭✭
    edited May 2018
    There is an extensive section in the Proxy Statement/Prospectus called "Material U.S. Federal Income Tax Consequences" on pages 127-130 SEC Filings:
    https://www.sec.gov/Archives/edgar/data/791907/000119312516712349/d260049ddefm14a.htm
    I then clicked on the Table of Contents to find it.
  • q_lurker
    q_lurker SuperUser ✭✭✭✭✭
    edited April 2017
    tvicki said:

    There is an extensive section in the Proxy Statement/Prospectus called "Material U.S. Federal Income Tax Consequences" on pages 127-130 SEC Filings:
    https://www.sec.gov/Archives/edgar/data/791907/000119312516712349/d260049ddefm14a.htm
    I then clicked on the Table of Contents to find it.

    The excerpts from the proxy statement were somewhat different than I have seen in other apparently similar transactions.  Specifically,
    A U.S. holder generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between (i) the sum of the cash and the fair market value (as of the effective time) of the Analog Devices common stock received pursuant to the merger and (ii) such U.S. holder’s adjusted tax basis in the Linear Technology common stock surrendered in exchange therefor. 
    Other cash-to-boot transactions have included a phrase as gain, but not loss and gone on to limit the gain.  Those different limitations were what I had taken into consideration.

    Given this additional information, it appears to me that the Schwab numbers may well be correct and that your Quicken transactions accurately reflect those numbers.  Further for this deal, the acquisition date for the Analog shares is 'time of merger' (your quandary over effective date).  But what that also means is that the hoop-jumping I outlined removing and adding shares is not applicable.  Your Buy Shares transactions should be fine in its own right.  

    In those other type cases, the gain would be limited to the $46/share = $36,800 and your new holding would carry over your old basis.  In this case with this structure, you are getting more capital gains now and will have less in the future as compared to that other style.  The companion aspect is that selling the Analog shares during the next year will be treated as a short-term gain/loss around that $82.95/share basis.  Short term gains are (generally) taxed at a higher rate than long-term gains.  Pay me now or pay me later, says the government.

    I think you are there.  Well done.  
  • tvicki
    tvicki Member ✭✭
    edited April 2017
    tvicki said:

    There is an extensive section in the Proxy Statement/Prospectus called "Material U.S. Federal Income Tax Consequences" on pages 127-130 SEC Filings:
    https://www.sec.gov/Archives/edgar/data/791907/000119312516712349/d260049ddefm14a.htm
    I then clicked on the Table of Contents to find it.

    Thank you!
    (My Investment Advisor says that since the $ amounts match Schwab I should go ahead and match the dates.)
    And now status of this question should be answered. Not sure if  I set that somewhere or if my comment here is enough and a Quicken employee or moderator will set it.
This discussion has been closed.