On Sunday, April 19, 2015 at 8:50:03 AM UTC-4, Not A Clue wrote:
> Now that April 15 rush is over, I hope someone will answer these questions:
>
> I owned an ADR of a foreign company ("FC"). The FC did:
>
> A. a reverse stock split 13:12,
> B. change the nominal value of the common shares from $0.30 to $0.01; and
> C. made a distribution of $x/new shares
>
> On line 15, it states "...aggregate new stock basis will generally equal the old basis plus gain, less cash received (but old basis and gain must be determined by each individual shareholder). Generally, new basis should be allocated amongst the shares received in a way that reflects the basis and holding periods in the shares surrendered."
>
> On line 16, it states "We believe that in most cases, the transaction will not result in an aggregate tax basis adjustment, i.e., in those cases in which the resulting gain is greater than the cash distribution. However, if the cash received exceeds the gain, the new basis would likely decrease (i.e., only the gain and not the cash amount would be added).....The FMV on the transaction date (March 27, 2014) date was approximately $14.21."
>
> Line 17 lists the applicable IRC as "IRC sec. 36B(a)(1)(E), 354, 356, and 358; also, generally, basis allocation should be carried out per Treas. Reg. 1.358(a)(2)(i)".
>
> Questions:
>
> 1. What is the "gain" mentioned in Lines 15 & 16 -- the difference between the FMV of the new shares on 3/27/2014 and the basis for the old shares? But I don't think so -- in view of the statement on line 16 "...in most cases, the transaction will not result in an aggregate tax basis adjustment...." -- different shareholders would have different purchase price and therefore the the "gains" <> cash received (a flat $/share payment).
>
> So, what is the "gain" in this case?
>
>
> 2. The payment/distribution for this transaction in C. above is clearly not a dividend (no withholding tax was deducted). But the 1099-DIV I received shows it as a Qualified Div. The brokerage firm tells me that is because it was reported to them as a Dividend; and they can't change it unless the FC changes it.
>
> So how should this payment be classfied -- 1099-B ? And does the FC need to amend their report to the brokerage firms?
>
>
> 3. A side question. Who makes the w/o tax deduction -- the transfer agent? Or the financial institution that holds the ADR for the investor? Or some other entity? [One brokerage firm tells me they do the w/o; while another firm tells me the company does.]
>
> TIA
I am trying to reply to Smilovitz's response. But when I click on Post Reply in Smilovitz's message, all I see quoted here is my original post. Anyway, this is a reply to Smilovitz's response.
The company is Ahold, a Netherlands co. In conjunction to the reverse split 13:12, it also made a payment of $x/new share. And on Form 8937, lines 15 & 16, it mention possible gains (I assume it would capital gains):
> On line 15, it states "...aggregate new stock basis will generally equal the old basis plus gain, less cash received (but old basis and gain must be determined by each individual shareholder). Generally, new basis should be allocated amongst the shares received in a way that reflects the basis and holding periods in the shares surrendered."
>
> On line 16, it states "We believe that in most cases, the transaction will not result in an aggregate tax basis adjustment, i.e., in those cases in which the resulting gain is greater than the cash distribution. However, if the cash received exceeds the gain, the new basis would likely decrease (i.e., only the gain and not the cash amount would be added).....The FMV on the transaction date (March 27, 2014) was approximately $14.21."
>
> Line 17 lists the applicable IRC as "IRC sec. 36B(a)(1)(E), 354, 356, and 358; also, generally, basis allocation should be carried out per Treas. Reg. 1.358(a)(2)(i)".
This is the part that I don't understand. I thought the distribution would be Return of Capital. How do I determine whether I have any gains?
The company's response is:
"For US shareholders, the transaction should be treated as a
recapitalization with boot and should qualify for dividend treatment. The
actual cash received should be the maximum amount subject to tax. The
amount subject to tax may be lower depending on the specific circumstances
of shareholders (e.g., in cases of little or no appreciation in their
shares)"