SNS-WEST Merger Details released

[OracleofCarolina]

http://finance.yahoo.com/news/The-Steak-n-Shake-Company-and-prnews-587664584.html?x=0&.v=1

[onyx1]

 

Does anyone know what the tax treatment of this merger will be for US investors holding WEST shares?  WEST shareholders will receive a dividend distribution of SNS shares (.4657 SNS per WEST share), and a debenture ($8.08 of par per WEST share).

 

If the dividend is a taxable event, how will the debenture distribution be treated?  For a holder of WEST with a basis of, say, $14.00, will the reciept of $8.08 in debentures and the elimination of WEST shares be considered a capital loss?

 

Or, will the SNS dividend be considered a return of capital without tax consequences?

[Junto]

I would consider it a return of capital, but you should check with your accountant.

[leftcoast]

I'm doing my (Canadian) taxes this long weekend, and noticed that my broker has reported WEST's dividend of SNS shares as fully taxable income on my T5.

 

I guess I really have 3 questions that I need to sort out:

1.) Is the SNS share dividend a taxable event?

2.) What's the right way to calculate the adjusted cost base for those SNS shares that WEST distributed?

3.) What's the right way to calculate the adjusted cost base for WEST shares that were sold after the SNS shared dividend (i.e. after WEST dropped to ~$9)?

 

I'll probably have to talk to a tax accountant to get this squared away, but in the meantime, has anyone else received any guidance on this? I'm sure other board members must have these same issues?

[link01]

I guess I really have 3 questions that I need to sort out:

1.) Is the SNS share dividend a taxable event?

2.) What's the right way to calculate the adjusted cost base for those SNS shares that WEST distributed?

3.) What's the right way to calculate the adjusted cost base for WEST shares that were sold after the SNS shared dividend (i.e. after WEST dropped to ~$9)?

 

I'll probably have to talk to a tax accountant to get this squared away, but in the meantime, has anyone else received any guidance on this? I'm sure other board members must have these same issues?

 

leftcoast, maybe this will help for west. unfortunately, i cant make out how my broker accounted for my sns distribution cost basis, because i'm unable to isolate the distributed shares from all my other direct purchased shares... not yet anyway.

 

i have fidelity here in the US. they keep track of cost basis by open tax lots, kinda like gainskeeper would if you had a broker without that capability (most dont, i believe). another great feature from them in addition to the new rate of return feature some on this board have been touting.

 

here you go:

 

**hypothetical example of an sns distribution on 10,100 shares of west

         qty cost per share cost basis

       10,100.00 6.53 $                65,952.78

       (10,100.00 west shares owned before distribution date)

       

 

pre-split sns distribution

0.465 shares of sns distributed per west share

12.03 closing price of sns on 11-6-09, day before distribution

 

         4,696.50 sns shares to be distributed at pre-split amounts

         4,696.00 sns shares to be distributed at pre-split amounts adjusted for fractional shares settled in cash

12.03 closing price of sns on 11-6-09, day before distribution

$    56,492.88 value of sns shares distributed

 

             234.80 sns shares distributed at post-split amounts

 

$    65,952.78 west cost basis post sns distribution

$    56,492.88 value of sns shares distributed

$  122,445.66 west cost basis pre sns distribution

       10,100.00 west shares owned before distribution date

12.12 west cost basis per share pre sns distribution

6.53 west cost basis per share post sns distribution

5.59 west value per sns share distributed

0.465 shares of sns distributed per west share

12.03 implied price per share of sns at distribution

 

 

[link01]

before i run out here's some other info i had jotted down some time back that you might find useful:

 

sep '07        158,600 15.24 $ 2,417,064

nov '07        374,900 11.39 $ 4,270,111

aug '07        299,945 15.58 $ 4,673,143

dec '07        297,500 11.4 $ 3,391,500

dec14-20 '07        112,700 10.63 $ 1,198,001

dec28-jan18 '08        127,000 8.8 $ 1,117,600

may16-20 09          35,000 6.89 $    241,150

 

total shares    1,405,645  17,308,569 west cost of sns

12.31 west avg cost per sh of sns

 

[leftcoast]

Thanks for sharing your calculations Link! A few follow-up questions to make sure I understand what you're doing...

 

Are you treating the $56,492.88 (value of SNS shares distributed) as taxable income for 2009? (It looks like you're not.)

 

Are you are calculating the new adjusted cost base for your WEST shares by taking your original cost base and subtracting out the market value of the distributed SNS shares at the time they were distributed? Or did I misunderstand that part?

 

Finally, from your second post, it looks like you are calculating your cost base for the distributed SNS shares using the avg price that WEST paid to acquire those shares ($12.31)?

 

[link01]

Are you treating the $56,492.88 (value of SNS shares distributed) as taxable income for 2009? (It looks like you're not.)

 

i'm not. nor is my accountant. and interestingly neither is my broker, fidelity. they have another nice little feature called tax info, ytd & by year ended, in addition to some very impressive year end tax form reporting. i think that the fact fidelity keeps track of tax lots for all purchases & sales helps with this. and they seem to be accurate & in accordance with up to date irs rules, tho they of course disclaim untimate resposibility & advise checking with your tax expert. here's a smaple of what they say in the footnotes:

 

<<IMPORTANT INFORMATION

 

The information reported above may not reflect all adjustments necessary for tax reporting purposes and may not be appropriate for use in preparing a tax return. You should use the official

tax forms that Fidelity sends by mail for purposes of tax return preparation.

 

Mutual fund distributions are usually taxable based on the record date of the distribution. For example, mutual fund distributions declared as payable to shareholders of record in December but which are actually paid in January are taxable as of the December tax year. These distributions are not reflected on the December account statement but are instead reflected on the January account statement when the dividends are paid. These distributions would be reported in the above table in December and would be reported on Form 1099-DIV for the December tax year.

Certain securities distribute dividends that are treated as interest under the Internal Revenue Code and the security is treated as issued with original issue discount (OID). Although OID amounts are reported on account statements as ordinary dividends, OID amounts are not reported in the above table as ordinary dividends because of their special tax treatment. For this reason, ordinary dividend totals reported on accounts statements may not match ordinary dividend totals reported in the above table. OID is reported to recipients and to the IRS on Form 1099-OID.

Information reported above is based on information known to Fidelity as of the date listed. Adjustments and reclassifications may occur through the subsequent tax year as additional information is made available. Generally these adjustments and reclassifications occur early in the subsequent year, but they can happen at any time. As new information becomes available, the above table and any applicable IRS Forms are updated accordingly. As a result, the information reported in the above table and on applicable IRS Forms may differ from information previously reported on account statements and/or the year-end Investment Report.

** Ordinary Income or Loss refers only to ordinary income or loss from dispositions of contingent debt instruments.

 

Foreign Currency Gain/Loss includes gain/loss from dispositions of foreign currencies, including exchanges of foreign currency for US dollars (USD), exchanges of foreign currency for securities and exchanges of foreign currency for different foreign currencies. It does not include gain/loss from other "Section 988 Transactions" (as defined in the Internal Revenue Code) such as dispositions of bonds denominated in foreign currencies.

Related Links

Tax Center

Your Fidelity Tax Forms

Analyze your taxable portfolio gains and losses>>

 

 

Are you are calculating the new adjusted cost base for your WEST shares by taking your original cost base and subtracting out the market value of the distributed SNS shares at the time they were distributed? Or did I misunderstand that part?

 

yes, exactly. and thats the way fidelity accounted for it too.

 

Finally, from your second post, it looks like you are calculating your cost base for the distributed SNS shares using the avg price that WEST paid to acquire those shares ($12.31)?

 

sorry, i just threw that out there fast before scooting out. i had collected & saved those sns purchase transactions in excel...unfortunately its incomplete because we know that west held 1,5553,545 shares of SNS prior to distribution. i never found the missing purchases

 

[link01]

<<unfortunately, i cant make out how my broker accounted for my sns distribution cost basis, because i'm unable to isolate the distributed shares from all my other direct purchased shares... not yet anyway.>>

 

as a follow up to the above, i checked all my open tax lots for sns & i still cant pinpoint the distributed shares from west there. but i know they are there somewhere because the open tax lots add up correctly to the no of shares i actually own & should own due to the transfered shares. and i also see them on my statements.  everything adds up fine there too when you take your shares owned pre distribution & multiply the no. of west shares held by .465. also i can see according to my statements the shares were transfered in on 11-9-09. BUT...in the open tax lots there is nothing on or around that date. nor is there any purchases with a cost basis approximating 12.03 or 12.12 (i have no purchases over 10.5) which was the price of sns pre-split at the distribution date & the approx avg sns cost basis for west respectively. nor is there any date in the open lots showing the correct no. of distributed sns shares i know were deposited on 11-9-09. i'm stumped, dazed, & confused how they are accounted for in the open tax lot feature...i only know they add up correctly. i need to call there tax dept on this.

 

[leftcoast]

Thanks again, Link. I really appreciate the insight.

 

As far as I can tell, the way that you (and Fidelity) are treating the SNS share distribution is consistent with a return of capital... it's not considered taxable income, and it reduces the adjusted cost base of your WEST shares. That makes sense.

 

So the only question still open is what to use for the cost base of the distributed SNS shares. For whatever it's worth (not much!), the way that makes the most sense to me is to use the price of SNS at the distribution date, since that's what you use to reduce the cost base of your WEST shares, and it keeps things consistent. But fortunately we don't need to figure this one out until we actually sell some SNS shares.  :)

 

Happy Easter!