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Tax treatment of stock buyout
Old 11-26-2006, 11:20 AM   #1
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Tax treatment of stock buyout

I am hopeful that one of our resident tax wizards will know the answer to this --

This past February (2006), I bought Phelps Dodge (PD) at $76 per share. Last week, it was announced that Freeport McMoran (FCX) is buying PD for $88 plus .67 shares of FCX per share of PD (as of the announcement, this would equate to about $126 per share of PD). It is anticipated that the transaction will close by the end of the first quarter of 2007.

If I hold the shares until the transaction closes, how is the distribution treated for tax purposes? Is it a capital gain, a qualified dividend or ordinary income? Does it make a difference if the transaction closes before or after my one year anniversary of holding PD?
How do I value the FCX shares that I will receive (I would presume they would be valued as of the close the day before). And is that considered a gain or is the basis passed through?

Any thoughts would be appreciated.

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Re: Tax treatment of stock buyout
Old 11-26-2006, 02:33 PM   #2
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Re: Tax treatment of stock buyout

Well, I don't claim to be a "tax wizard", but I have been through several of these as an investor, so I will share with you what I can.

First of all, you should get a merger offering which will explain the terms of the deal, the financial aspects of the companies involved, and information on the expected tax treatment for the deal.

I don't know the specifics of the PD-FCX deal, but typically they work as follows:

If the deal is structured as a "reorganization", you will have a capital gain (per share) equal to the lesser of (1) the cash received or (2) the total value of the stock plus cash minus your basis. So, using your numbers, your capital gain would be 126 - 76 = 50 (which is less than 88). Keep your fingers crossed that the deal closes at least one year after your PD acquisition date so your gain will be long-term.

Your new basis, again for your numbers, would be the price of FCX at the closing.

Hope this helps - but again, more specific info will be in the offering memoranda.
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Re: Tax treatment of stock buyout
Old 11-26-2006, 02:51 PM   #3
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Re: Tax treatment of stock buyout

In any of these buyouts or spinoffs, the company website gives great details for the shareholders on how to do their taxes. Like FIRE'd@51 wrote, they will also mail you the info, but you will probably lose it all before tax time, so you will end up using the web anyways.
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