How to enter a company acquisition, part cash, part shares AZN/AXLN

chrisonline2

I'm struggling to get my head around this, I cannot work it out from the options offered in the Quicken Investing section. AstraZeneca (AZN) has just acquired Alexion (ALXN). The terms were $60 CASH and 2.1243 AZN shares, for each AXLN share.

How can I enter those transactions in my portfolio in Quicken, ensuring correct capital gains treatment (the cash payment is subject to capital gains based on the basis when I bought AXLN shares, but the shares issued by AZN are rolled over at the original basis and do NOT trigger capital gains at this point, only when they are sold at a later date). Obviously the end result should be cash in the cash account, new AZN shares in the portfolio, and zero AXLN shares in the portfolio; and with the capital gains report showing a capital gain for this year based on the cash issued net of the original basis - BUT only that proportion of the original AXLN shareholding (the cash value works out at APPROX 33% of the overall purchase price including value of the AZN shares on the acquisition date).

Sorry if it's complicated to explain, hopefully some bright mind out there will see the light?

Tom Young

Entering these sorts of stock plus cash transactions into Quicken can be tricky as there's no "wizard" to guide you through the needed entries.  The reason for this is because the income tax rules and regs require some very specific accounting for the transaction.  If you have multiple lots of Alexion you're pretty much forced to do calculations outside of Quicken - a spreadsheet helps - and then make a series of specific entries into Quicken to get you the results you're looking for. 

The tax rules dictate:

1.  You need to calculate your gain or loss on a lot-by-lot basis.
2.  Your true economic gains are calculated as: (cash + FMV of stock received as "proceeds") minus the basis of your stock.
3.  You report the smaller of the calculated gain or the cash received as gain.
4.  If you calculate a loss based on the cash + FMV proceeds you can't use the loss.  For a loss lot you report a $0 gain or loss.
5.  For each lot your basis in the stock of the new company is: Basis in lot of old company tendered - cash received + gain recognized.
6.  The holding period of the each lot tendered of the old stock carries over to the new lot received of the new stock.  

Got all that?

You can see that a spreadsheet (if you have many lots) is almost a necessity.  When you do your calculations you use the correct exchange ratio - 2.1243 - which will almost certainly create fractional shares for each lot.  That's the correct approach as the full amount of stock received for each lot - including fractions of a share - figure into that lot's "proceeds."

You should also see at this point that the "basis" you're going to use in your income tax return might be the basis of the lot tendered, (gain calculated on cash plus FMV of stock minus basis is less than cash received), or it might be the lot's entire basis (a "loss"), or some number in between.  That is you "derive" the basis depending on the amount of the reporable gain, or loss.  (It's even more complicated than that for income tax reporting purposes as some brokers report only the cash as proceeds and some brokers report the sum of cash plus FMV of stock as proceeds.)

Costbasis.com is using $57.77 as the fair market value of the stock received but I can't see that AstraZeneca has yet published a Form 8937 with their own opinion as what the "correct" number might be.  (There's no "cookbook" definition of fair market value in these cases so there can be different opinions.  You might want to hold off until AstraZeneca publishes their version.)

Having gotten your ducks in a row my method for entering these transactions in Quicken is:

1. Make one entry to Remove all old shares
2. Make one entry to Add back all your old short term shares using any date that makes the new "lot" short term and using a per share cost that comes to the derived basis determined above.
3. Make one entry to Add back all your old long term shares using any date that makes the new "lot" long term and using a per share cost that comes to the derived basis determined above.
4. Sell your short term and long term holdings for the cash you received for each "lot'. At this point your cash (before cash in lieu) is properly stated in Quicken and your long term and short term gains are properly stated.                                                                    Now do a series of Add actions to establish each lot of "new" shares using an appropriate "acquired" date (same as date of lot tendered) and an appropriate per share cost to come to the basis you calculated for each lot.                                                                    Then you sell whatever fractional shares you "should have" received for the cash in lieu, recognizing a gain or loss as appropriate.

If you have several lots and are willing to share I have a spreadsheet that will calculate all this for you.  Information needed is Date, Number of shares, Per share cost for each lot.

Tom Young

Entering these sorts of stock plus cash transactions into Quicken can be tricky as there's no "wizard" to guide you through the needed entries.  The reason for this is because the income tax rules and regs require some very specific accounting for the transaction.  If you have multiple lots of Alexion you're pretty much forced to do calculations outside of Quicken - a spreadsheet helps - and then make a series of specific entries into Quicken to get you the results you're looking for. 

The tax rules dictate:

1.  You need to calculate your gain or loss on a lot-by-lot basis.
2.  Your true economic gains are calculated as: (cash + FMV of stock received as "proceeds") minus the basis of your stock.
3.  You report the smaller of the calculated gain or the cash received as gain.
4.  If you calculate a loss based on the cash + FMV proceeds you can't use the loss.  For a loss lot you report a $0 gain or loss.
5.  For each lot your basis in the stock of the new company is: Basis in lot of old company tendered - cash received + gain recognized.
6.  The holding period of the each lot tendered of the old stock carries over to the new lot received of the new stock.  

Got all that?

You can see that a spreadsheet (if you have many lots) is almost a necessity.  When you do your calculations you use the correct exchange ratio - 2.1243 - which will almost certainly create fractional shares for each lot.  That's the correct approach as the full amount of stock received for each lot - including fractions of a share - figure into that lot's "proceeds."

You should also see at this point that the "basis" you're going to use in your income tax return might be the basis of the lot tendered, (gain calculated on cash plus FMV of stock minus basis is less than cash received), or it might be the lot's entire basis (a "loss"), or some number in between.  That is you "derive" the basis depending on the amount of the reporable gain, or loss.  (It's even more complicated than that for income tax reporting purposes as some brokers report only the cash as proceeds and some brokers report the sum of cash plus FMV of stock as proceeds.)

Costbasis.com is using $57.77 as the fair market value of the stock received but I can't see that AstraZeneca has yet published a Form 8937 with their own opinion as what the "correct" number might be.  (There's no "cookbook" definition of fair market value in these cases so there can be different opinions.  You might want to hold off until AstraZeneca publishes their version.)

Having gotten your ducks in a row my method for entering these transactions in Quicken is:

1. Make one entry to Remove all old shares
2. Make one entry to Add back all your old short term shares using any date that makes the new "lot" short term and using a per share cost that comes to the derived basis determined above.
3. Make one entry to Add back all your old long term shares using any date that makes the new "lot" long term and using a per share cost that comes to the derived basis determined above.
4. Sell your short term and long term holdings for the cash you received for each "lot'. At this point your cash (before cash in lieu) is properly stated in Quicken and your long term and short term gains are properly stated.                                                                    Now do a series of Add actions to establish each lot of "new" shares using an appropriate "acquired" date (same as date of lot tendered) and an appropriate per share cost to come to the basis you calculated for each lot.                                                                    Then you sell whatever fractional shares you "should have" received for the cash in lieu, recognizing a gain or loss as appropriate.

If you have several lots and are willing to share I have a spreadsheet that will calculate all this for you.  Information needed is Date, Number of shares, Per share cost for each lot.

chrisonline2

Wow, thanks Tom for your comprehensive and detailed response.

I get the principle of several lots, but in fact my own case is relatively simple - just one single purchase of AXLN, in Nov 2020 (and therefore all short term, unfortunately!).

I had already come to the conclusion that I would have to split the AZN acquisition into two pro-rated lots (approx 33%/67% though not exactly that), for the cash purchase and the share exchange, applying the same pro-rating of the AXLN basis to the cash (triggering a capital gain now); and the new AZN shareholding (assigning a basis awaiting a future sale of AZN).

How to enter that into Quicken and generating a correct Capital Gains report, was the challenge. A good start is your suggestion to simply remove the ALXN holding up front (whereas I was trying to pro-rate and convert via exchanges etc)

I am confused about your comments on FMV. Surely this would just be the last closing price of ALXN before trading ceased? And not sure how it actually comes into play in my calculations and pro-rating?

Hopefully I am on the right track now, but please stop me in my tracks if you think I have misunderstood!

Many thanks again for your interest and care in replying so thoroughly

Chris

Tom Young

"I had already come to the conclusion that I would have to split the AZN acquisition into two pro-rated lots (approx 33%/67% though not exactly that), for the cash purchase and the share exchange, applying the same pro-rating of the AXLN basis to the cash (triggering a capital gain now); and the new AZN shareholding (assigning a basis awaiting a future sale of AZN). "

I'm not sure why you would think that you'd end up with two lots of AZN.  You should end up with one lot of AZN since you tendered only one lot of AXLN.  The holding period from AZN would carry over to the new lot of AXLN with a basis of

Basis of lot tendered - cash received for the lot + gain (if any) recognized. 

And the gain is the lesser of the economic gain (value of everything received minus basis of AXLN tendered) or the cash received for the lot.

The point about the FMV of the AZN is that there's no hard and fast definition of what that number should be.   Form 8937 will disclose what the company thinks is appropriate but even that's not definitive.  Commonly used number are Opening price after the deal has closed, closing price after the deal, average of high and low on the day after the deal, etc.  You can use any number you like though, theoretically, you might have to defend that number to the IRS, and the number you can affect your gain reported.

If you care to disclose the detail I posted above about your lot I can give you the numbers to use, using the $57.77* FMV used by Costbasis.com. 

*erroneously used $60.00 in my original post; corrected above.

chrisonline2

No, I don't mean two lots for AZN, I mean splitting the transaction into two, one for the cash, one for the share exchange, each pro-rated for their relative proportion of the overall value of the transaction, and ending up with a single holding in AZN which has the original pro-rated basis from the ALXN purchase.

Thanks also for pointing out the Costbasis.com site - I was not aware of that, it looks very useful and for future reference.

As I said earlier, I think I get the overall concept of the split and valuations, just couldn't see how to build them into transactions in Quicken, given the options available in the program. You have explained that I I can't do that simply, and need to work it out separately and adapt the entries to reflect the appropriate bases etc

I don't think I'm prepared to disclose the specific numbers, on a public site like this, but thanks for the offer.

Many thanks again sincerely for your input

Chris

Derek Marsano

Thanks Tom for your detailed and authoritative discussion of calculating cost basis for shares of Astrazeneca received through the acquisition of Alexion. It seems to me that your method is the most precise way of calculating both return on the original investment in ALXN and the cost basis of the new AZN lots. I built a spreadsheet as you suggested, and wound up with a negative cost basis for my new AZN shares. That just seemed odd, although I guess it indicates a nicely profitable investment in ALXN. It does make sense, as the $60/ALXN share plus the value of the new AZN shares exceeded my original ALXN share price.

I computed a price for AZN at the acquisition date 7/21/2021 of $57.9042, by dividing the cash-in-lieu amount I received by the fractional shares of AZN remaining after the 2.1243 conversion rate. For me, this was $44.87 / 0.7749 = $57.9042.

The negative cost basis for AZN did not agree with my brokerage statement, which showed unit costs of between $46.50 and $48.70 for my 3 lots, now showing trade dates in 2/2020, matching the ALXN lots.

In the end, I entered 6 transactions in Quicken:

1- CGLong for ALXN for the $60/share received.
2- Remove all ALXN shares.
3, 4, 5- Add AZN shares (in my case, 3 lots) with Transaction_date 7/21/2021, and Date_acquired matching the original trade dates of the 3 lots of ALXN. I made sure the Number_of_shares and Total_cost match the brokerage statement, and let Quicken calculate the Price_paid (out to 6 decimal places).
6- CGLong for AZN for the cash-in-lieu of the fractional AZN share.

(Note: the two CGLong transactions are entered by selecting transaction type Inc-Income (Div, Int, etc.), entering the Security_name, and filling the Long-term_cap_gain field.)

I suspect what my broker did was to calculate the unrealized gain for each of my 3 lots of ALXN, then compute a hypothetical purchase price for 3 lots of AZN as at the original 3 purchase dates.

At the end of the day I have a match with my brokerage statement and I expect a match with the eventual brokerage 1099 tax reporting statement.

I'd be very interested to hear your thoughts.

Tom Young

" I built a spreadsheet as you suggested, and wound up with a negative cost basis for my new AZN shares. That just seemed odd, although I guess it indicates a nicely profitable investment in ALXN."

No, that indicates some sort of error as an original cost basis of even a dime a share would still result in a positive cost basis in the AZN shares. 

" It does make sense, as the $60/ALXN share plus the value of the new AZN shares exceeded my original ALXN share price." 

This suggests to me that you might have used the wrong gain number as my "dime a share" example show.  I doubt your basis was as low as a $.10 per share.

It sounds like you've got Quicken in sync with what the broker is showing so you should be OK.

You might want to go back to your spreadsheet an figure out what you did wrong, even try and see if you can duplicate the broker's numbers.

q_lurker

Just to toss in my $0.02 worth …

a) @“Tom Young” is right; you should not have any negative cost basis lots. 

b) Tom and I take somewhat different approaches on these events but we both reach the right end, I believe. 

I can’t present my approach in detail at this time, but the gist is:
a) Sell all shares of original shares AXLN at the ‘right’ price. Each lot might have a different ‘right’ price such that the sale does not exceed the fair market value received nor does the gain on the sale exceed the cash ($60/share) received. 

b) Buy shares of acquiring company AZN at price that leaves the cash received in the account. 

c) Remove those shares just purchased because they now have the wrong acquisition date. 

d) Add Shares of the acquiring company by lot with the correct basis and acquisition date for each lot. 

e) If applicable, sell any residual fractional share for the total cash-in-lieu received. 

I find that sequence just makes sense to me and seems to get to the right end. Maybe it can help others. 

If you need further help on the right price or other details, I can probably offer more later next week. 

Derek Marsano

Hey Tom,

I'm still working on this, having received brokerage statements. The broker has simply copied the cost basis for each ALXN lot to each AZN lot, and sold the ALXN shares at $60/share. Clearly that method does not represent the true capital gain. I've attached a spreadsheet showing my calculations. Would you please look it over and let me know if it correctly captures your method? Thanks.

Derek Marsano

Turns out I cannot upload the spreadsheet, drat.

q_lurker

Derek Marsano said:

Hey Tom,

I'm still working on this, having received brokerage statements. The broker has simply copied the cost basis for each ALXN lot to each AZN lot, and sold the ALXN shares at $60/share. Clearly that method does not represent the true capital gain. I've attached a spreadsheet showing my calculations. Would you please look it over and let me know if it correctly captures your method? Thanks.

Actually, in your case, the cost basis of the new lots sounds correct.  The $60/share sale may end up being correct IF they report the basis on the year end 1099-B as $0.  

My snip of a spreadsheet for your three lots is below.  Since your basis was low (less than $122.774/share), your reportable cap gains at this time is the $60/share cash received, and the original basis of each ALXN lot transfers to the new AZN holding.


My chosen $57.795 for the fair market value of the received AZN shares is based on the Form 8937 filed for this acquisition and is the average of the hi and lo prices immediately after the acquisition.  YMMV.     

HTH