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How to handle stock merger - VMware & Broadcom (edit)

questionsforever

so this is confusing as my broker seems to use fmv of the original security before before the stock exchange but this makes no sense to me as why not use the cost basis of the original shares.

example…vmw avgo merger 52% stock, 48% cash.

Say the vmw stock immediately prior to the closing has a cost basis of 52000. Say the fmv of the stock at closing is 61000.

my broker seems to think my cost basis in avgo shares is 61000 x .52 or 31720. If 56 shares where issued it's a cost of 566.

But why does this make sense since your your cost in the new company should flow from the original cost of the source shares , not their fmv. So 52000x.52 or 27040, or 483 per share. Big difference.

which method is right and which does quicken use in a share for share merger?

btw, this method has same issues in stock spinoffs..do you use % of fmv or % of cost basis ?

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q_lurker

This fundamentally appears to be a Corporate Acquisition (straightforward in Quicken), but may also be a cash-to-boot merger or a cash deal. A portion of a Barron's article states: "VMware holders had the choice of electing to receive 0.252 shares of Broadcom for each VMware share or $142.50 a share in cash."

I am not seeing enough of the details to be clear, and it may also have been a choice for the VMW shareholder. Cash-to-boot mergers are more complex that Quicken can easily handle and tax consequences and status pay a major role in that subsequent process.

If it's a cash deal, you are selling VMWare shares for the cash received.

If it's an exchange of shares (the 0.252 AVGO shares for each VMW share held) AND it is a tax free exchange, it is a Corporate Acquisition and your cost basis in VMW will transfer to your new AVGO shares. You provide Quicken the closing value of AVGO but that is simply for an entry into the AVGO price history. It is not used in any calculations.

If it's a 'normal' shares + cash deal, the value you received (FMV of AVGO shares and cash value) gets compared to your VMW cost basis to determine if part of the cash might be treated as current capital gains.

I am also having trouble following your figures since AVGO closed on 11/22 at $972 (NASDAQ). Where are you trading in what currency?

questionsforever

Another issue is that the deal was pro-rated. Therefore assume 52% was stock received and 48% was cash received.

My calculation (manually) is as follows:

cost basis of VMW is $51,600 or $121/share (430 shares)

(A) 48% of those shares was issued as cash at $142.5 per share.

So - 206.4 shares sold at $142.5 = $29,412. Cost basis of those shares is 206.4 x 121 = $24,974.

(A) Capital gain on cash portion = $29414-$24974=$4437.60

(B) 52% of those shares was converted to AVGO stock, rolled over tax-free presumably.

So - 223.6 shares became 56.4 shares of AVGO with a cost basis equal to 223.6x$121 or $27,055.6.

27,055.6 / 56.4 = $479.70 as 'flow-through' cost basis of AVGO.

Market value of AVGO at merger time $974.

(B) UNREALIZED GAIN on Avgo is $494/share or $27,861.

This (B) portion is not taxed until sold.

—

It seems the issue is the broker did not adjust the calculations until today. I see that the cost basis of (B) is now correct.

For (A) however their cash portion realized gain is completely different.

Their calculation is: 56.4 shares of AVGO received with value of 55,255.25 or $979.7/share.

The cash portion (A) disposition proceeds is 206 x $142.5 as above = 29,414

BUT, they considered the (B) portion converted to stock, 224 shares having a FMV of $142.50 also, like the cash portion, not my actual cost basis in these shares of $121/share. Therefore, they assumed the gain on the cash portion was

$55,255.25 - (142.5 x 224=$31929) = $23326 = cost basis of sold shares.

The broker shows the gain for (A) as $29,414-$23326 or $7033.

This compares to my $4437.60 as the gain on the cash portion using the $121/share original cost of the 206 VMW shares sold for cash at $142.50.

I can't really understand why they would roll over 56.4 avgo shares at correct cost basis of $494/share and then claim a $7033 on the cash portion. They didn't even use the 206 shares sold but used the rolled over portion 224 to calculate the realized gain on the cash portion. Doesn't make sense.

If you understand how they could possibly get a $7033 let me know. I think maybe they got the VMW cost basis wrong but without their input next week hard to say.

In Quicken, I just did this:

Sold 206 shares of VMW at $142.50

224 remaining, which I will enter a Corporate stock for stock merger with the 252 for 1000 ratio.

Tom Young

Clearly this deal is a little bit of everything:

Provided the transactions qualify for the Intended Tax Treatment, the U.S. federal income tax treatment of the transactions to a U.S. holder (as defined in the section titled “Material U.S. Federal Income Tax Consequences”) of VMware common stock will depend primarily on whether such holder exchanges its shares of VMware common stock solely for shares of Broadcom common stock, solely for cash, or for a combination of shares of Broadcom common stock and cash:

•U.S. holders of VMware common stock who exchange their shares of common stock solely for shares of Broadcom common stock generally will not recognize gain or loss on the exchange, except with respect to cash received in lieu of a fractional share of Broadcom common stock.

•U.S. holders of VMware common stock who exchange their shares of common stock solely for cash generally will recognize gain or loss on the exchange. Such gain or loss generally will be equal to the difference, if any, between the amount of cash received and the U.S. holder’s adjusted tax basis in the shares of VMware common stock surrendered.

•U.S. holders of VMware common stock who exchange their shares of common stock for a combination of shares of Broadcom common stock and cash generally will recognize gain, but not loss, on the exchange. If the sum of the fair market value of the Broadcom common stock and the amount of cash received by a U.S. holder in exchange for such holder’s shares of VMware common stock exceeds the tax basis in the shares of VMware common stock, such holder generally will recognize taxable gain on the exchange equal to the lesser of the amount of such excess and the amount of cash received in the exchange.

questionsforever

"U.S. holders of VMware common stock who exchange their shares of common stock solely for cash generally will recognize gain or loss on the exchange. Such gain or loss generally will be equal to the difference, if any, between the amount of cash received and the U.S. holder’s adjusted tax basis in the shares of VMware common stock surrendered"

"If the sum of the fair market value of the Broadcom common stock and the amount of cash received by a U.S. holder in exchange for such holder’s shares of VMware common stock exceeds the tax basis in the shares of VMware common stock, such holder generally will recognize taxable gain on the exchange equal to the lesser of the amount of such excess and the amount of cash received in the exchange."

Exact same cash , but different gain??

Sure one is 100% and the other say 50%, but logically it would seem to be just 50% of the first case. Why is the treatment of the gain completely different under a mix blend? Why not just sell the 50% for cash, calculate it under the same method as ''all-cash", then deal with the other 50% under the 100% stock scenario. 2 parts. The mix method is very strange and the gain is not the proportional gain as if you had mixed the first two methods separately.

q_lurker

EDIT 11/29 — Subsequent information appears to make the thoughts presented below incorrect.

From the prospectus page 87, Form 8-K filing dated Oct 23, 2023 (emphasis added)

Exchange for Broadcom Common Stock and Cash
A U.S. holder who receives a combination of Broadcom common stock and cash (other than cash in lieu of a fractional share of Broadcom common stock) pursuant to the transactions generally will recognize gain (but not loss) in an amount equal to the lesser of (1) the sum of the amount of the cash (other than cash in lieu of a fractional share of Broadcom common stock) and the fair market value of the Broadcom common stock received, minus that U.S. holder’s adjusted tax basis in its shares of VMware common stock surrendered in exchange therefor and (2) the amount of cash received.

That appears to be very standard language for a cash-to-boot merger. It also, in my interpretation, would say you look at the whole deal, not the cash part and stock part separately. But I am also NOT qualified to offer tax advice. Do your own due diligence and consult with whomever you need.

As a Cash-to-boot transaction considering the quote I just included, my Excel math is as follows.

That $979.495 AVGO share valuation is the average of the reported High and Low on 11/22/23. You can use another value, like your $974 if you choose. Those lead to:

Your Basis per share ($120 for $51,600 or $121 for $52,030) puts you in the bought-VMW-cheap category at less than $128.473/share. That then means the whole cash received would be treated as current capital gains (point 2 in my quoted section above) and your carryover basis from VMWare to Broadcom is high (less capital gains in the future)

Noting my procedure sells all the VMW and Buys new AVGO shares, that creates the wrong acquisition date for the AVGO shares. Thus my steps 4 and 4a, Remove those just bought shares and re-Add them so that the Acquisition date can be corrected back to when the original VMW shares were bought.

A further note is that this process should be applied on each lot of VMW shares owned. If they have different relative basis (per share) values, the treatment can vary.

Also, at some time in the next 45 days, I'd expect Broadcom to publish an IRS Form 8937 with their 'suggested' treatment of this deal.

Finally, to repeat, this is not qualified tax advice. Perhaps some part of this is comparable to your broker's values.

questionsforever

I see. This is a radically different method of computing gain as I had thought. I guess this is only like this because of the tax laws.

The method I described is the same as this one - https://www.wikihow.com/Adjust-Cost-Basis-After-a-Merger

This is the logical, intuitive one, from basic principles, assuming a full roll-over of the stock portion.

This method above seems like some arbitrary 'mix' of what you realize and what you carry as unrealized. You realize a gain of 29k on 430 shares (versus my computation on cash portion alone of around 4.3k) And your cost basis of AVGO goes up to 914 (instead of my pure stock merger of the remaining portion of 481/share of AVGO).

But if the cost basis of AVGO is 914 (vs market value of $978 on date of merger) one cannot say this is a tax-free merger right? I mean 914 vs 978 sounds like the entire thing has been taxed as if disposed in full (almost)?

It also differs from my brokers computation of realized capital gain which so far seems to be:

actual cash received on 206 shares of 29,355 - (market value of AVGO shares received (978.87) x 56.448 = 55255.25 - (rolled over portion of 224 shares x market value of VMW on date of roll over of $142.48/share) = 31915.52.

Realized gain = $29,355-$31915.52 = 7030.26

So far I got 3 different figures for cost basis, and realized gain on this from 3 different methods.

I guess I'm going to wait and see what my broker produces for the tax documents in February. They also produce a remaining position cost basis report.

It seems to me that there are only two possible methods that make sense to me. The entire transaction is taxable. In my case this is ~$32,000 because 121/share cost basis - 978.87x224+142.5*206, or both cash and stock is separate and i have a large unrealized gain on the rollover and a small 4.3k gain on the cash portion. I'm not sure if pro-ration changes anything in this transaction or not. These two methods, the one above, and my brokers method seem to be two 'intermediate' calculations that spread the realized and unrealized gain in some 'mix' between the two extremes. But I'm really scratching my head to understand how this is a tax-free roll-over when I would pay tax on almost the entire amount of the gain.

q_lurker

The main difference I see in the WikiHow article and what I was referencing was that the WikiHow presented the situation as the investor had an all cash option and all stock option. Too many people (and their example investor) chose the all-cash and the company said, "Nope. We are prorating the cash and stock distributions."

In the cases I was citing, the terms up front were so many shares and so much cash.

With further reading and understanding, the Broadcom / VMWare situation is more like the first - They offered $142.50 cash or 0.252 shares stock, and some 96% of the shareholders went for the stock option. Broadcom effectively says "Nope. Not distributing that much of our stock. everyone gets stock and cash."

So my question becomes:

Under terms of the merger, you (presumably) offered 430 shares of VMWare for 0.252 times as many AVGO shares (108.36).
They gave you 56 AVGO shares (and sold 0.4 giving you the cash-in-lieu) and they gave you $29,412 in cash.
Did they accept some 223.8 shares of VMWare exchanging those for 56.4 Broadcom shares and selling the remaining 206.2 shares for the 142.50 rate ($29,383.50)? — I think your view and the WikiHow case
OR did the terms become each VMWare share tendered was exchanged for 0.1312 Broadcom shares and $68.40 cash? — my effective terms above as a more classic cash to boot merger.

I have no idea at this point about which is the correct approach. I can certainly understand the WikiHow presentation, but the language I saw in the prospectus definitely suggests the classic approach.

Either way requires special handling in Quicken (Sells, Buys, Adds, Removes, etc.). I suggest finding something you are comfortable with for the moment. Be prepared to adapt as the brokerage numbers might change. Be alert for the IRS Form 8937 to be published by Broadcom. Be prepared to adapt as 1099 data becomes available in early 2024. Don't blindly assume the brokerage is right, though this is enough of a popular holding that they should eventually get it right.

questionsforever

Yes, and the broker has a method that is like neither of the two we discussed! Strangely enough, the cost basis in the website of my broker does show the cost basis of the new AVGO shares as $482. Therefore their internal software had it one way in one spot - AND another way in another spot.

Btw for your "

OR did the terms become each VMWare share tendered was exchanged for 0.1312 Broadcom shares and $68.40 cash? — my effective terms above as a more classic cash to boot merger."

Why is #2 and #4a needed? Why would you add AVGO, then remove it and add them back? And do you mean like you have to separate out each of the 56 shares → which VMW lot they belonged to?

I notice the stock to stock merger feature of Quicken very nicely does this without manual effort. Is there a way to do the transaction as per your stock and boot method AND using the quicken stock to stock merger feature to get the right lot separation?

I guess until the 8937 comes out I will keep it at the lower cost and separate cash and stock received method. The pro-ration also throws me off somewhat. Another issue is that I'm not a US shareholder and I have NO idea what the method of accounting is (Canadian). From what I read , in Canada if the merger is 100% stock for stock, the method as as I suggested/Wikihow. But if you receive even $1 of cash, then suddenly the entire transaction might become taxable. I have no idea. From here - https://www.miningtaxcanada.com/mergers-acquisitions/ it seems to suggest you can elect any amount on the 'spectrum' of gain to cash or stock but it can not be less than the fair market value of the boot. What is confusing here is that the boot is the entire value of the gain (29k vs 31k is the entire gain!). It's like Alice in Wonderland.

Also I am not sure I understand this boot method. It seems the entire amount of the gain is taxable. If so, why is the cost basis not 979.5 for the 56.448 shares?

E.g. cost 121 vmware shares x 430 = $53,030

Disposition = $979.5 * 56.448 + 68.4/share cash = 84703

Total gain = $31,627.

It seems to me the most logical methods would be the gain is either

$31,627 (entire amount taxable, new cost basis of AVGO shares is 979.50) OR
$4300 (entire cash portion is taxable, and None of the stock portion is taxable with a new roll-over cost basis of $482/share AVGO)

I am not sure about any other 'intermediate' separation of cash and stock compensation, which I don't really understand.

if I do choose #1 , which differs from the method you described by a few thousand dollars? $29k vs 32k? (is it because I chose $121 as cost of VMW?), is there a way to enter it using the stock to stock merger feature of the Quicken to preserve the original lot info?

q_lurker

The 8937 is advisory only, not mandatory, with respect to specific values. But I would expect it to be definitive with respect to the overall correct procedure. The 1099 should flow from whatever the 8937 suggests.

To try to clarify that a bit further, the 'normal' cash to boot relies on Fair Market Value of the acquiring company after the merger. The 8937 for that type of deal suggests a fair market value, but the investor (the investor's broker) can choose a different FMV if they choose.

Costbasis.com ( https://costbasis.com/stkchanges/cashtoboot.html ) presents some thoughts on these types of deals including some thoughts on 'mixed election' deals where some shares might go for cash and other shares are for security exchange. They are not yet (as of yesterday) offering anything on this deal.

q_lurker

My brokerage finally posted what I believe to be accurate information. My explanation is:

Opted for full stock exchange. Got partial cash, partial cash exchange
- Specifically, about 48% of the shares offered (144 shares) were sold for cash at the 142.50 rate. The number of shares sold were an integer (whole) number of shares, no fractional portion. 69 Shares sold = 47.9% of those offered. Basis of those shares was through a minimum gain calculation (most expensive shares sold).
Balance of the shares (75) were exchanged at the 0.252 exchange rate (0.252 * 75 = 18.9). The basis of those shares received in exchange was the balance of the unsold shares.
Finally, the fractional portion of the received AVGO shares (0.9 in my case) were 'sold' for cash in lieu. In my case, that was recorded on 11/28 at a rate of $974.4889/AVGO share ($877.04).

So my Quicken transactions became:

11/22/23 Sold 69 shares VMW at 142.50/shares (chose minimum gain lots)
11/22/23 Corporate Acquisition with VMW acquired by AVGO at 0.252 exchange rate; AVGO value at $972.00/share
1. That generated Remove Shares of VMW (75) and Add Shares of AVGO (18.9)
11/27/23 Sold 0.9 AVGO Shares for the cash-in-lieu amount (rate of 974.4889/share)

All that matched my brokerage account. I am 99% sure it will match 1099's next year.

questionsforever

That is sort of what I got too, however how was the FMV $972 determined? At my broker I got 978.87$. Also, do the form 8937 tend to come out soon? I am thinking to sell 1 share of AVGO to see what the activity statement shows as the cost basis. However, they have told me in the past that their activity statements do not always match the cost basis on the tax forms, or even in other spots on their trading platform. They always seem to say the boiler-plate line that consult with your tax advisor and that their statements may not match the same methodology. Certainly, taking the FMV of vmw on the date 1 day prior to the merger (Nov 22) as the 'new cost basis' for all gain transactions is 100% wrong since the cost basis of VMW must flow-through from the original cost of the VMW purchases. There is also the issue of the broker using FIFO for displaying gains versus the method I am required to use which is AVG-COST. Quicken always seems to use AVG-COST, which I think is correct.

q_lurker

The $972 is simply the closing cost Quicken is going to plug into the price history for AVGO on the date of the 'acquisition' transaction. It does not directly enter into any calculations. I believe it would be treated as a 'transaction' subject to update by downloads or other sources (hierarchy rules), but have never confirmed that. Thus, since I dated the transaction 11/22, I used the 11/22 AVGO closing price.

I believe the Form 8937 is required to be published within 45 business days of the closing. Especially in this case (number of investors holding VMWare), I would hope it would be quicker. Looking at timing on prior Broadcom 8937 forms does not support that optimism.

the broker is using FIFO for displaying gains …

Displaying what gains where and how? Are they reporting your realized gains from the 'sale' of the 206 VMW shares as those FIFO shares sold? Or are they showing the current AVGO shares with dates associated with the first (or last) shares of VMWare acquired?

… versus the method I am required to use which is AVG-COST. Quicken always seems to use AVG-COST, which I think is correct.

In US, average cost (as I understand it) only applies as an option for mutual funds and dividend reinvestment plans. Canada is different. US Quicken will only use average cost for mutual funds (a choose-able option for that specific security type). I don't know Canadian Quicken's programming, but you seem to suggest it always uses average cost for multiple lot holdings.

The Form 8937 will offer nothing concrete on the basis determination.

My reinterpretation of your data:

You had (exactly?) 430 shares of VMWare. Approximately 47.9% were supposed to be sold for cash @$142.50. I would expect that to be exactly 206 shares for you (no fractions) yielding $29,355 as a cash addition to your account on the sale. How that is treated with respect to your cost basis is between you and your broker and Canadian tax authorities. Lacking specific direction from you, a US brokerage would be using FIFO. Maybe there is a standing order to compute minimum gain or somehow use an average cost. So there is a somewhat broad range of possible basis values there. Also, this seems to be for you an account trading in USD, perhaps through a US brokerage(?).

Your remaining 224 shares would swap out to 56.448 shares of AVGO. Whatever remaining basis would transfer to those 56.448 shares. That set of 56.448 shares would be in however many lots were not sold after the 206 share sale. You would (for Quicken's purposes) receive those 56.448 shares and then sell the 0.448 shares at (I believe) 974.4889/share grossing $435.57. The basis of those sold shares also has some flexibility to it.

That cash-in-lieu price of $974.4889 was the price for my transaction. It should be constant for everyone, a value computed and used by Broadcom as they took all the small fractional shares together, sold them all at once, and distributed the proceeds proportionately all the cash-in-lieu recipients.

Quoting you from earlier

actual cash received on 206 shares of 29,355 - (market value of AVGO shares received (978.87) x 56.448 = 55255.25 - (rolled over portion of 224 shares x market value of VMW on date of roll over of $142.48/share) = 31915.52.
Realized gain = $29,355-$31915.52 = 7030.26

Good on the 206 shares
Good on the $29,355 cash received on 'sale'
The $978.87/share was the closing value of AVGO on 11/24 (Friday), so in that context, good, but the value on 11/22 was less (closed at $972)
Not clear what your "Realized Gain =" calculation is. Is the Broker reports realized gains of $7030?

Lets try this:

BEFORE
- Shares = 430
- Value / Share = about 142.5 +/-
- Value = $61,275
- Basis = 430 * $121/sh = $52,030 Total in whatever number of lots
- Unrealized Gain = 61,275 - 52,030 = $9,245
MERGER (11/22/23)
- Sell 206 shares VMW at $142.50 = Gross proceeds = $29,355
  - Basis of Sold shares = $121/share — >$24,926 (assuming use of average cost applies throughout)
  - Realized Gain = $29,355 - $24,926 = $4,429
- Receive 56.448 shares AVGO
  - Value/share = $972 (close of business 11/22/23)
  - Value = $972/sh * 56.448 shares = $54,867.46
  - Basis of AVGO shares = Before Basis less Sold Shares Basis = 52,030 - 24,926 = 27,104
  - Unrealized Gains = $54,867.46 - $27,104 = 27,763.46
Cash in lieu distribution
- Sell 0.448 shares AVGO at 974.4889 = $436.57
  - Basis for that sale = 0.448 / 56.448 * $27,104 = 215.11
  - Gain on that sale = $436.57 - $215.11 = $221.46
FINAL STATE
- Cash - $29,355 + $436.57 = $29,791.57
- AVGO - 56 Shares at $972/share (for consistency) = $54,432 (Wed, 11/22/23 value)
  - AVGO Basis - $27,104 more or less - $215.11= $26,889
- TOTAL Value = $29791.57 + $54,432 = $84,223.57 (11/22/23)
- Realized Gains = $4,429 + 221 = $4,650
- Unrealized Gain = AVGO Market Value - $26,889; changing daily.

All those values I've used assume the Average cost basis is applicable throughout.

questionsforever

Yeah, that looks about right, pending the final determination of how I must treat the cash sale and even the roll-over. It is clear the upper limit if the entire thing IS taxable is $26889+4650. There may be some other possible mixes. But short of any guidance I'll go with the most logical method. Either way, my tax rate is low enough this year that if I take it all then I can re-adjust the AVGO cost to FMV and not pay any tax going forward, unless it goes up further. But I will decide by next March.

Not clear what your "Realized Gain =" calculation is. Is the Broker reports realized gains of $7030?"

Yes, the broker has shown a gain on my activity statement calculated in a weird way.

Proceeds = cash value = 29355

Basis = 56.448 * FMV (978.887) = $55255.25 - (224 x 142.48) = $55,255.25-$31915.52=23339.73

Gain = 29355-23339.73 = 7030.26

Very odd and I'm inclined to ignore it for now. The fact they used 224x142.48 suggests they took the market price just prior to merger closing (not even $142.50 received IN the merger) and used that as the cost basis for the rolled over shares.

I see what they did. That's clear. Why they did that , no idea yet. I plan to sell 1 avgo share, but I suspect the cost basis they have for it is $565.40/share. Why do i believe that? Because the fractional share 0.448 was sold at market price and had a cost basis of $565.40. No idea where they got that either but it all seems to suggest they took the FMV of VMW shares the day prior to the merger as the 'new cost basis' for the entire merger. Clearly wrong, but that's what they did. So their statements may not be useful for anything unless they update it. They do publish tax forms after Feb 28 and those may have different values.

q_lurker

Part 1 - So restating that "Gain" equation, it is:

Gain = 29,355 - 23,339.73 = 7030.26
Gain = 206 * 142.50 - (56.448 * 978.887 - 224 * 142.48) = 7030.26
Gain = 206 * 142.50 - (224 * 0.252 * 978.887 - 224 * 142.48) = 7030.26
Gain = 206 * 142.50 - 224 * (0.252 * 978.887 - 142.48)
Gain = 206 shares * $142.50/share - 224 shares * ($246.68/share - 142.48/share)
Gain = (cash received on 'sold' shares) less (bump-up in value on kept shares)

That is about as much an apples and ~~oranges~~ snowflakes calculation as I can imagine.

Part 2 - Max gain possible "if the entire thing IS taxable". Adding my guessed AVGO basis of $26,889 to my guessed realized gains of $4,650 doesn't make sense.

I would look at it that you received $29,355 cash and $972 * 56.448 shares AVGO (54,867.46) for a total value received of $84,222.46. (Use 978.887/share if you prefer.) With your total basis of 430 * $121/share = $52,030, that max possible gain would be the difference of those two = $32,192.46. In that scenario, your basis on the current AVGO shares and the fractional share would be the $972/share. That doesn't seem to be the case.

Part 3 - The 565.40 — 565.40 on the less numerous AVGO shares would be equivalent to 0.252 * 565.40 on the more numerous VMW shares. WOW - that 142.48 value again. That 142.48 * 430 shares is a total value pre merger of $61,266.40. Compared to your basis of $121/share (52,030) that would be a gain of $9,236.40

From there you sell 206 shares for 142.50 = 29,355 with a gain of 0.02/share = 4.12 bringing the overall gain to 9,240.12

Now convert to the AVGO shares - 224 shares become 56.448, basis/share goes from 142.48 to 565.40, such that the total basis on those shares is 224 * 142.48 or 56.448 * 565.40 = 31,915.52 (or 31,915.70 due to rounding difference).

Now sell 0.448 fractional share at (my value of) 974.4889/share = $436.57. The basis would be the 0.448 * $565.40 = $253.16 for a realized gain of $183.41

That final picture becomes:

Cash - $29,355 + $436.57 = $29,791.57
AVGO - 56 Shares at $972/share (for consistency) = $54,432 (Wed, 11/22/23 value)
- AVGO Basis - 56 Shares at $565.40 = $31,662.40
TOTAL Value = $29791.57 + $54,432 = $84,223.57 (11/22/23)
Realized Gains = $9,236.40 + 4.12 + 183.41 = $9,423.93
Unrealized Gains (vary daily as market value of AVGO changes = Market Value AVGO less $7,878.88

(Note that this part of the discussion ignored the reported $7030 gain discussed in Part 1)

That whole picture centers on the gain from when you bought to day before merger (from $121/share to $142.48/share) being treated as a taxable gain at this time. In which case, the new AVGO holding gets treated as bought at that price presumably on that date.

So my US way — Realized Gain = 4,650 and 56 shares AVGO basis = $26,889
Your broker's way - Realized Gain = 9,424 and 56 shares AVGO basis = $31,662
Your broker's gain higher by 4,774 and basis higher 4,773 — a pay me now, not later arrangement (Canadian law vs US?)

(Forgive my penchant for taking numbers to the penny. Helps me keep track of exactly what I am doing.)

questionsforever

Yeah that sounds about right. But not sure why there is a difference between part 1 and part 2 (7030 vs 9400).

I will be selling 1 share of AVGO soon to confirm if the cost is indeed 565/share. And I don't think FIFO will matter if the cost basis was reset on the day of the merger.

What is your opinion about the broker method of selling all the VMW on day of merger at FMV, calling that a realized gain, and somehow rolling the cost of the stock portion into AVGO from this price of $142.48 instead of one's actual cost basis ($122/share)? I opened a ticket to ask them about it but they have not answered yet. I have never seen such a treatment before. It is neither the look-through method from the original cost basis as you discussed, nor is it even the minimum boot method, which takes the boot as no less than the cash portion received which adjusts the AVGO cost basis almost to the FMV on date of merger.

q_lurker

What is your opinion about the broker method of selling all the VMW on day of merger at FMV, calling that a realized gain, and somehow rolling the cost of the stock portion into AVGO from this price of $142.48 instead of one's actual cost basis ($122/share)?

My opinion is that it is inconsistent with the descriptions of U.S. Federal Income Tax Consequences of the Transactions to U.S. Holders in the prospectus (page 87 ff).

https://www.sec.gov/Archives/edgar/data/1124610/000114036122035833/ny20005454x1_defm14a.htm#TOC

But that may not apply in any fashion to your situation. Nor am I any form of a tax professional or financial wiz, so my opinion is totally worthless. (But I still don't understand the justification of it.)

questionsforever

From what I understand here is what the broker did:

0. 430 VMW shares initially held.
1. The proceeds was equal to the 206 VMW shares cashed out at the market price just prior to the merger for $142.48 = 29355.
2. The basis was equal to the market value of AVGO received ($55255.25) minus the FMV of the 224 remaining VMW shares converted to AVGO shares valued at $142.48 = 23,339.72
3. The cost basis of the AVGO shares received for the remaining 224 VMW Shares was 31915.52 or on 56.448 avgo shares received = $565/share.

Final allocation: $7030.26 USD gain + 56.448 AVGO shares with a cost basis of $565/share USD.

This is so bizarre! 29355-23339 is not $7030! That is what they said the gain is. It is $6016!

Just alice in wonderland.

q_lurker

$29,355 corresponds to 142.50, not 142.48. If you received $29,355 that was the cash price Broadcom was offering in the deal ($142.50) on the 206 VMW shares exchanged for cash. The 'market price' of the VMW shares is not a factor; they were not sold "at market price" other than the fact that the market gravitated to that price knowing that was available.

2. The basis was equal to the market value of AVGO received ($55255.25) minus the FMV of the 224 remaining VMW shares converted to AVGO shares valued at $142.48 = 23,339.72

The basis of what equals that 23,339.75?

I can find NO justification supporting $7,030 as the realized gains. Look at it this way (all before the cash in lieu adjustment):

Original Basis = 430 * $121 = $52,030
New Basis = 56.448 * $565.40 = $31,915.52 (The 565.40 happens to be $142.48 / 0.252; it is the value the broker is applying to the shares going forward, so you say; as the broker applied it to the cash in lieu amount).
Therefore, $20,114.48 of basis was closed out.
You grossed 206 * $142.50 = $29,355 in cash
With $20,148.48 being associated basis for that part of the transaction, the realized gain would have to be $9,240.52

You (and I) say that $565.40 basis per AVGO share is wrong.

New Basis should be 56.448 * $480.16 = $27,104 = 224 * $121; the carryover basis from the VMW shares (the 480.16 is simply $121 / 0.252)
In which case, $24,926 of basis was closed out.
You grossed 206 * $142.50 = $29,355 in cash
With $24,926 being basis, the realized gain would have to be $4,429

[NOTE/REMINDER: to any of the above, the cash-in-lieu disposition is going to increase the total realized gains by about $175-225 and reduce the ongoing basis of the now 56 AVGO shares by about $200-250.]

So yes, there does happen to be a basis/share for the 56.448 AVGO shares that would yield the $7,030 realized gain number. It would be $526.24 for the 56.448 AVGO shares or $132.61 for 224 VMW shares which total $22,324.80 as the total basis going forward. But I know of no reason to be using that basis/share.

You have a sound argument (in my opinion) for using a $480.16 basis per share on the AVGO shares leading to realized gains on this deal of $4,429. That is carrying over the basis from the VMW shares that converted to AVGO.

Maybe there is a reason to treat all shares as stepping up to the 142.48 or 142.50 level, computing the gain on that change — 142.50 - 121 = gain of 21.50/share. Multiply by 430 shares to realize a gain of $9,245. Carry forward with the AVGO shares from that new basis level (142.48 equated to 565.40). While that seems to be what your broker's putting forth, it does not support the $7,030 realized gain figure.

I have asked them specifically what method they will put on the tax forms that are send directly to the government. I figure you can't go wrong with that, although it might be wrong, I doubt anyone will say anything if you used an official tax form.

The broker's are not infallible. I am AR/OCD enough that I want it right, but you are right, you are not likely to be challenged using their data. Using the $7000 gain now basically short the government on their tax rate times $2,000 == $300-500 maybe. Tough to get excited about.

questionsforever

FYI, I just sold 1 AVGO share on Friday at $929 per share. The cost basis of the broker is $429 per share. I've opened up each lot of the converted AVGO shares from the original VMW shares and it seems that it used a FIFO treatment. The avg basis is still $536 (also a dubious method) but it seems one has to do their own calculations.

edmondme

I know I have done this before, I know I have, I just can't remember how and what I did.

Vmware just got sold into Broadcom. 100 shares of Vmware are not 23 shares of Broadcom, how do you do that? I just entered it as sold 100, bought 23. But that's not right.

q_lurker

That is a more complicated event than just transferring from one to another. There is another discussion here about that deal but it has been further complicated by Canadian related aspects.

For your 100 shares of VMW, I would have expected you to get

$6,840 cash (sell 48 of the 100 VMW shares)
13.104 shares of AVGO (Corporate Acquisition with a 0.252 share ratio.)
$3.78 cash as cash in lieu (sell the 0.104 AVGO shares)

But since you said 23 AVGO shares, something is off base.

Frankx

Hi @edmoncme,

I guess that you are talking about the final deal that Broadcom made to VMware shareholders which, after an inordinate amount of time. was finally approved days ago.

I did take a look to see what the actual transaction specifics were, but that information doesn't seem to be published yet (as best as I can see). Depending on the specific details around your ownership of VMware (i.e. when you bought the shares, etc.) the transaction you will need to enter into Quicken may vary, so you'll need to wait until the specific information is provided to you by your brokerage. But the good news is that VMware stockholders definitely benefited from the ongoing back and forth with regulators on the merger.

So your entry described above is not correct, but let us know when you receive the final specific terms and we'll help you with how to get that into your Quicken file.

Frankx

edmondme

What if I do a stksplit VMW 100 → 23, and then then rename VMWare to Broadcom and the stock symbol corresponding.

Note: 100 to 23 is an estimation, I don't remember the exact shares I am dealing with, but Broadcom shares are much lower (almost a 1:4 ratio)

q_lurker

I believe you’ll find the stock split option a very inaccurate representation of this event. Check your records with your financial institution.

BradS

First, don't compare this to any previous merger. I have seen a lot of 8937s (most not my own), and have never seen anything split into whole lots. When dealing with stock+boot they always give the way to do the calculations for your shares (each lot). You start with the original stock, at its basis, for each one you get a fraction of that many shares of the new company, plus an amount of cash, both fixed per share.

Assuming tax favored, you treat it as being sold for the sum of that cash per share and the market value per share of the fraction (which can be less than 1, exactly 1, or greater than one). Note that the market value, you can usually choose between the average of low/high for the first trading day of the new stock, or average of open/close on that day. You're not supposed to use the closing price.

From that you come up with a gain or loss (remember, this is per lot). If there is a loss, you have no loss to report (likely you have to report the sale but at no gain or loss), and the basis, as I recall, is original basis minus the boot. It lowers the basis similar to a tax free dividend.

If there is a gain, you report the lesser of that gain, or the received boot (again per lot), as the reportable gain, and add whichever that is to the basis of the new stock. In effect, by paying tax on that gain, it adds to your basis.

If not tax favored (no positive IRS ruling), each lot (same table, different calculation), is treated as being sold for the FMV (same calculation) plus cash, with a reported gain or loss, and the basis of the new stock is that FMV. Effectively you sold it for cash and that cash (less the boot) was used to buy stock in the acquiring company.

THIS IS NOT THAT. And I have never seen it done this way.

But it appears that some of your tendered shares were sold for cash (as stated above), for a gain equal to $142,50 (cash you received per share), with a gain/loss comparing that to the basis of those shares. And the rest of your shares were exchanged tax-free for AVGO shares, with the total basis equal to the basis of VMW shares — for price per share, divide by the number of AVGO shares. Again, everything is per lot. And it appears that you could have chosen the methodology in advance (likely too late now, but who knew they were going to do this, as I said, I've never seen it). Likely your account has a default, FIFO, LIFO or least gain. If we knew in advance that this was going to be done, we could have provided instructions; it's possible your broker still may allow that but it's supposed to be done in advance.

Now the remaining fraction is trivial, use the above to get the basis, and sell for whatever they report it was sold for. IF all was actually sold by AVGO it's possibly they assigned the average price they got to everyone so all have the same selling price; likely everyone has their own basis.

In my case it took over a week with my sending messages asking where the cash was, to get the cash for the ~48%. That still doesn't show up in my gains/losses (wonder if they'll just report it as a sale with no basis, although they have the basis). As for the fraction, today that FINALLY showed up in the gains/losses, SOLD FOR ZERO. You bet, another message for that, at almost $900 I'm not allowing them to steal it. If as reported above, it was sold by AVGO and distributed, maybe they didn't get it yet and/or didn't know how much it was going to be. It does look like the price reported is a price not seen since. I hope and expect that it goes past that (I had far more AVGO than I received for my VMW).

q_lurker

@BradS I am not sure to whom you were directing your comments.

@questionsforever is a Canadian user using Quicken-Canada. Their tax laws appear to be a little different that US policies that may (or may not) impact the discussion I have had with him on this merger. Of course all the SEC filing and 8937 forms are directed toward US citizens and investors.

@edmondme seems to be a US user using a US Quicken, though that is an assumption on my part.

My circumstances (also US based) are in this message —

https://community.quicken.com/discussion/comment/20399934#Comment_20399934

In that case I found and interpreted that the conversion seemed to NOT take the normal (as you cited) path for a cash to boot transaction. I found that 48% of my VMW shares rounded to a whole share were sold for the $142.50 rate essentially as one independent transaction. Then the remaining 52% (rounded again) were converted to AVGO shares at the 0.252 share ratio. Finally, the fractional share cash in lieu amount was received. Throughout that process, the (two) lots of VMW were properly accounted for - minimum gain for me on the 48% 'sale' covering one lot and part of second lot converted transferring appropriate cost basis. 'Sale' for cash-in-lieu reports cap gains using correct cost basis.

I applied my circumstances to predict what I thought @edmondme would have actually received.

I did note previously in this discussion that the SEC filing did use that cash-to-boot language about not taking losses. But as applied by my folks, that did not come into play. Had I applied the 'normal' cash-to-boot process, there would be more cap gains to report (and tax).

We'll see what the 8937 has to offer. Thanks for chiming in.

BradS

I was addressing US rules. I don't know about Canadian rules — yes I read of them on this thread.

BTW, I checked with the CPA/CFP I do some work for, and she's never heard of any takeover being done this way. She's only seen them the way I detailed. If their method stands, I guess that's the way it has to be. Maybe this is why my broker took so long and still hasn't given me the cash for my approximately 0.9 shs of AVGO they show as sold for zero.

questionsforever

But I got the fractional avgo share immediately and got them sold automatically. My broker used a third method which is to sell all the VMW for $142.48, price on date of merger, book the gain, then roll over 52% of the sold vmw shares into avgo from the 142.48$ disposition price. Apparently that 3rd method is also a possibility…I don't quite know how 8937 works or the 1099 issued in January. Does the broker first 'guess a method' and then when they get some more feedback from their tax department or read the 8937 they can somehow update how they issue the 1099 form?

BradS

https://community.quicken.com/discussion/comment/20401396#Comment_20401396

That is about the worst thing that could have been done (other than it simplifies the tax treatment).

The reason everyone who made the election went for the stock is that the stock is worth so much more than the cash. And the reason the stock went to more or less the 142.50 after the election is that the only shares that were not locked up did not make the election, and were destined to have the cash election if the deal closed. I had suggested that elsewhere before the election period closed.

So you got less than you would have received if you held on until it closed, and bought AVGO stock for much more than the price you would have effectively had for roughly 52% of your shares. You could have waited, and bought stock with the cash you got. (UNLESS you didn't make the election, or elected for cash. In that case it only cost you 2¢ per share.) The fact that you could do that makes me think that either you didn't make the election, you bought it after the election was closed (when the stock fell to about 142.50, or you rescinded the election (that is tougher as I was told it could take a few days).

WHY did the stock trade for almost 150 after that deadline? Guessing it was people speculating (literally) that the deal would not happen, and either they believed that VMW was worth more on its own, worth more on its own with the addition of the fee for the deal not closing ($1.5B as I recall), or that the deal would be made later with AVGO having to give a better deal on the shares… or even just allowing a last minute reopening of the election period.

questionsforever

avgo added to cost basis calculator. But is this calculator doing it as the 8937 says ? https://www.costbasis.com/stkchanges/cashtoboot.html