As explained on the “cash to boot” page of this website, mergers between corporations sometimes are paid for with a combination of stock and cash, which provides a unique accounting challenge. The general tax rule is that you must pay capital gains tax on such a transaction, but only to the extent of “cash to boot” which is the amount of cash you actually received. (It’s technically called a Section 368 reorg.)
In some cases, such as Fording Canadian and the Wyeth merger with Pfizer, the merger consideration is fully taxable–your sales proceeds include both the cash received and the market value of the new stock.
In other cases, such as the Schering-Plough merger with Merck, the cash portion is treated as a redemption (unless you already owned shares in Merck.) If you owned Merck already, you have to run tests set forth in Section 302 of the Internal Revenue Code to determine if you meet the requirements to be eligible to treat the cash portion of the merger proceeds as a redemption rather than a dividend. Don’t worry, we can help. Just use our Calculator for Section 302 Tests.
Our handy calculator tool will help you deal with your accounting nightmare! Use our special BNSF calculator for the unusual dual exchange ratios involved in the prorated stock election for the merger of Burlington Northern Santa Fe Corp into Berkshire Hathaway Inc. Because the stock election was oversubscribed, everyone who made this election received cash to boot. Click on the picture of the BNSF train engine to access the calculator.
Our regular “cash to boot” calculator has pre-filled data ready for many recent corporate merger transactions which had stock with “cash to boot” such as:
Alcon (by Novartis)Medco (by Express Scripts)Nicor (by AGL)Marvel (by Disney)Schering-Plough (by Merck)Sterling Financial (by PNC)Wyeth (by Pfizer)Click on the picture of the boot toaccess the calculator.
Cash to Boot Calculator
The gain or loss should be calculated separately for each tax lot (purchase date.) If you have a huge number of tax lots from dividend reinvestments, you can use the average cost method, but you must create two pools–one for long-term tax lots and one for short-term tax lots.
In using this calculator, make sure that the cash payment you received was for a cash and stock merger, not for cash in lieu of fractional shares as a result of a stock split or stock for stock merger. In that case, you should use the stock split calculator or the stock merger calculator instead.
In many cases, you might even receive two cash payments for the same transaction–a larger one for the “cash to boot” and a smaller one for “cash in lieu” of fractional shares.
For fully taxable “cash to boot” transactions, the broker/dealer may report only the cash portion of the proceeds on your Form 1099-B at year-end. Since the IRS will be checking to see if your Schedule D total sales proceeds agree with your Form 1099-B totals, you have two alternative ways to report this on your tax return:
(1) Report only the cash portion of the proceeds in column (d) of Schedule D and reduce your cost basis in column (e) by the market value of the new stock received so that your gain or loss in column (f) will agree with the value provided by the “cash to boot” calculator.
(2) Report the combined total of the cash portion of the proceeds and the market value of the stock received in column (d) of Schedule D and report your cost basis in column (e) with no further adjustments. Again, your gain or loss in column (f) should agree with the value provided by the “cash to boot” calculator. Attach a statement to your return explaining the adjustment that you made to the sales proceeds reported for that transaction.
To the right is a “pdf” file containing a sample short statement to complete and attach to your tax return for fully-taxable “cash to boot” transactions where the broker/dealer reported only the cash proceeds on your Form 1099-B. If you use tax preparation software, you can retype this information into the “miscellaneous statements” section of the program.
Explanation of Form 1099-B DifferenceCertain complex transactions such as the Banknorth Group Inc simultaneous spinoff of TD Banknorth Inc and “cash to boot” sale to Toronto Dominion for TD common stock plus cash can be handled by first applying the spinoff calculator and then using the resulting new cost basis in the “cash to boot” calculator for the rest of the transaction.
You can also use the calculator for merger transactions where you provide the data.
If you know of other mergers with “cash to boot” please help us build our database for the benefit of all users. Please send us the details so that we can add it to the table of pre-filled values.