U.S. and International Security Transactions That Will Have Investors and Their Advisors Working Overtime This Tax Season
Year-end is typically a time when investors take a step back to assess their winning and losing holdings, and some may be surprised by what they find as they begin to determine how their taxes will be impacted.
To help investors be better prepared, the tax analysts and editors at CCH’s Capital Changes have identified what they believe will be the ten most tax significant and complex corporate actions for investors this year. CCH Capital Changes, a Wolters Kluwer Financial Services publication, is the leading suite of electronic and print products used by capital market participants to address tax basis and related tax issues involving publicly traded stocks in the U.S. and world capital markets.
“Corporate actions, like stock splits, mergers and spin-offs, happen every day. All of these transactions affect an investor’s basis in stocks and securities which is needed to accurately determine his or her capital gains and losses at tax time,” Denise Davidson, an attorney and managing editor for CCH Capital Changes, said. “Calculating basis is never easy, particularly for long-term holdings and those holdings involving multiple corporate actions over time. However, there are some transactions each year with a higher level of complexity or that are particularly confusing. Identifying these before you sit down to figure out your taxes can help you be better prepared.”
Those securities that made the “CCH Capital Changes Top 10 Corporate Actions” for 2005, as reported in the December 9, 2005, issue of the CCH Capital Changes In-Depth newsletter, in order of significance, are:
- Trump Hotels & Casinos
- Toronto Dominion/Banknorth
- Precision Drilling
- Mustang Resources/Thunder Energy/Forte Resources
- Ashland/Marathon Oil
- Kensington Resources
Sears/Kmart – Capital Gain or Ordinary Income?
As mentioned in CCH Capital Changes Reporter’s Mar. 24 edition, the acquisition of Sears, Roebuck & Co. [NYSE: S] by Kmart Holding Corp. [NASDAQ: KMRT] resulted in both companies merging into a separate holding company, Sears Holdings [NYSE: SHLD]. A complex aspect of the merger was determining the manner of computing gain recognized by Sears shareholders receiving stock and cash because of uncertainty regarding whether a 50% test under Internal Revenue Code Sec. 304 was met.
Trump Hotels & Casinos – Tax Consequences of Receipt of Cash
Before Trump Hotels & Casinos, Inc. [OTCBB: DJTCQ], completed its bankruptcy, additional cash consideration was paid to shareholders under the company’s bankruptcy plan. However, the disclosure statement for the plan and its tax section were not revised to address the receipt of cash. This corporate action was reported in CCH Capital Changes Reporter on May 20.
Verizon/MCI – Alternate Merger Structures and Special Dividend Taxation
The merger of MCI, Inc. [NASDAQ: MCIP] with Verizon [NASDAQ: V] is expected to close at the end of 2005 or early 2006. The tax disclosure for the merger notes that two alternative merger structures could be used—one taxable and one tax-free, and that the final merger structure will not be determined until the actual closing of the merger. Further complicating the tax implications, a special dividend of $5.60 was declared and paid in October 2005, but the tax treatment of the special dividend as a dividend or merger consideration was unclear. More information about this corporate action can be found in the Oct. 6, edition of CCH Capital Changes Reporter.
Toronto Dominion/Banknorth – Unusual Two-Step Merger
As reported in the Mar. 1 edition of CCH Capital Changes Reporter, Banknorth Group, Inc. [NYSE: BNK] and Toronto-Dominion Bank [NYSE: TD, TSE: TD], agreed to a two-step merger transaction that resulted in tax consequences that were unusual for many investors accustomed to analyzing single taxable or tax-free mergers.
Precision Drilling – Conversion into Unit Trust, Distribution of Stock and Cash, and Extraordinary Dividend
In Nov. 2005, Precision Drilling Corp. [TSX: PD, NYSE: PD] was converted into an income trust and shareholders exchanged their shares for trust units. Also, certain businesses were sold and Weatherford International shares, along with cash, were distributed to shareholders. The Precision Drilling transaction was confusing to some investors because the transaction was both a tax-free exchange and a taxable distribution. As a result, the basis of the units and stock received was not determined as some investors expected. The magnitude of the distribution – which was more than $18 a share -- raised concerns regarding the amount taxable as ordinary income, the potential reduction of a holder’s basis in Precision Drilling trust units received, and whether special tax rules applicable to extraordinary dividends applied. More information about this corporate action can be found in the Nov. 7 edition of CCH ADR/Global Capital Changes Reporter
PriceSmart – Mandatory Allocation of Stock Basis to Rights Received
PriceSmart, Inc. [NASDAQ: PSMT], issued one right per share common, exercisable for the purchase of additional common at two different prices, depending on whether the right was exercised in January 2005 or January 2006. The PriceSmart rights traded on NASDAQ, facilitating valuation of the rights. Because the value of the rights on the date of distribution was more than 15% of the value of the common on the same day, holders who sold or exercised their rights were required under U.S. tax law to allocate basis between their stock and the rights received. In allocating basis to the rights, holders had to reduce the basis of the common on which the rights were distributed. Some shareholders may not be aware of this mandatory allocation. CCH Capital Changes Reporter’s Dec. 21, 2004 edition includes additional information about this corporate action.
Mustang Resources/Thunder Energy/Forte Resources – Different Tax Consequences for Different Shareholders
In 2005, Mustang Resources Inc. [TSX: MUS.A, MUS.B], Thunder Energy Inc. [TSX: THY], Forte Resources Inc. [TSX: FRZ] combined to create one new publicly traded trust and a total of three new publicly traded companies. Holders of Mustang, Thunder and Forte shares each received as consideration units of the new trust and common shares of one or more of the three newly created companies. However, U.S. tax consequences for Mustang, Thunder and Forte shareholders varied significantly from one company to the next. For example, for Mustang shareholders, the transaction resulted in recognition of capital gain or loss; for Forte shareholders, the transaction resulted in recognition of capital gain or loss for only part of the consideration they received; and for Thunder shareholders, taxability depended on whether or not the transaction qualified as a nontaxable reorganization under Code Sec. 368(a), which was unclear. Additional information about this corporate action appears in the Jul. 7 edition of CCH ADR/Global Capital Changes Reporter.
Ashland/Marathon Oil – Allocation of Basis for Exchange of Common Stock
Ashland Inc. [NYSE: ASH] transferred its interest in certain businesses to Marathon Oil Corp. [NYSE: MRO], in exchange for common and other consideration on June 30, 2005. Ashland shareholders received Marathon common stock and common stock in a successor corporation to Ashland (New Ashland). The distribution of shares was structured to qualify as tax-free, and the fair market value of New Ashland shares was needed because holders were required to allocate basis in their old shares between the Marathon and New Ashland shares received. The key tax issue was determining the fair market value of New Ashland shares since they did not trade on the date of distribution. CCH Capital Changes Reporter’s June 30 edition includes more information.
Frontline – Distributions Made During Prior Year and Potential Extraordinary Dividends
According to CCH ADR/Global Capital Changes Reporter on June 16, Frontline Ltd. [NYSE: FRO] made several distributions of Ship Finance International Ltd. shares to its shareholders and a total of $10.10 per share in cash dividends in 2005. Frontline has not yet issued a tax opinion regarding the Ship Finance distributions for 2005, leaving its shareholders uncertain as to how to book these distributions. Frontline may not have sufficient information to provide shareholders with guidance until after the end of its tax year. In January 2005, they issued a tax opinion for all 2004 distributions stating that the Ship Finance distributions for 2004 were taxable as a dividend. Holders must also consider whether these payments will be considered extraordinary dividends, which require corporate shareholders to adjust the basis in the related stock and could result in all or a portion of certain short-term capital losses being characterized as long-term under tax rules for qualified dividends under Code Sec. 1(h)(11)(D)(ii).
Kensington Resources – When Merged Companies are Both a Passive Foreign Investment Company
Kensington Resources Inc. [TSXV: KRT] amalgamated into Shore Gold Inc. [TSX: SG], and although both Kensington and Shore Gold indicated they expected the amalgamation to be treated as a tax-deferred reorganization, Kensington indicated it believed it qualified as a passive foreign investment company (PFIC) for current as well as prior taxable years, and Shore Gold indicated it expected to qualify as a PFIC following the amalgamation. The fact that Kensington and Shore Gold likely qualified, and continue to qualify, as PFICs triggered potentially significant and complex tax consequences for Kensington shareholders. This corporate action can be found in the Oct. 28 edition of CCH ADR/Global Capital Changes Reporter.
CCH Capital Changes provides a comprehensive source for current corporate action reporting. In addition to detailed tax information and analysis, it provides timely and concise summaries -- updated daily -- of spin-offs, mergers, exchange offers, reorganizations, bankruptcies, stock dividends, splits and other corporate actions affecting publicly traded securities of both U.S. and foreign companies. Renowned for its accuracy, completeness and timeliness, subscribers trust CCH Capital Changes to provide the information needed to properly reflect the tax consequences of their corporate actions .
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