Their basis would be increased by the amount of gain they were taxed on.
For example, if a shareholder receives ,000 in cash along with stock from a merger and his investment had grown in value by ,000 based on his original investment of ,000, the following would occur.
The shareholder would have to report $10,000 in gains and his new basis in the stock would be $15,000.
For complex returns, consult with a tax professional, such as a certified public accountant (CPA) or licensed attorney, as he can best address your individual needs.
Often a liquidation is overseen by a receiver, or a chosen representative of the shareholders, who oversees the process to ensure that it runs smoothly and that the corporation maximizes the return from the sale of its assets.
When you receive a liquidating dividend, the amount will be reported to you on a 1099-DIV form, in either box 8 or 9.
The capital gain is treated as long-term or short-term depending on whether you owned the shares for longer than a year.
If you purchased the stock at different times, divide the dividends into short-term and long-term proportionally, based on when each block of stock was acquired.
The former target company stockholders transfer their basis to their new stock, and when they sell their acquiring company stock they will use that figure to calculate their taxable gain or loss.
However, if the merger is for cash and stock, the target company's stockholders must recognize gain attributed to the transaction to the extent they received cash.
The former target stockholders get their acquirer stock from a liquidating dividend.
The purpose of these types of mergers is to minimize tax repercussion, so if only stock is exchanged, no gain or loss will be recognized by either party.
Keep your tax records for at least seven years, to protect against the possibility of future audits.