Microfocus tax implications

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
abeaver
Posts: 13
Joined: Mon Oct 25, 2010 1:27 pm

Microfocus tax implications

Post by abeaver » Tue Apr 10, 2018 2:11 pm

I was one of the "lucky" people to experience the Microfocus inversion/merger/spinoff that HPE did this year. To make things more fun I have 2 lots of HPE in different accounts. I believe I have things figured out but wanted to run it by the community in case I missed something.

So here is what I've come up with for one of the lots.

Starting out with 400 shares of HPE, cost basis $3,360.98, purchase date 01/01/2000.

HPE spun off Seattle Spin CO 1:1, based on the HPE guidance I should allocate 77.92% of my basis to HPE and 22.08% to Microfocus. That results in:

400 shares of Seattle Spin CO with a basis of $742.10
400 shares of HPE with a new basis of $2,618.88

The Seattle Spin Co merger with Microfocus results in:
  • Sale of 400 shares of Seattle Spin Co with a net 0 capital gain/loss
  • 54.930444 shares of Microfocus valued at $29.34/share
  • Sale of .930444 factional shares of Microfocus with proceeds of $29.75
Based on the HPE docs, I should have 2 taxable events from the above transactions.
  1. $2.45 in gains on the fractional share sale (29.75 - 29.34*.930444 (basis))
  2. $869.56 in gains due to the inversion/merger (Share value - original basis = 29.34*54.930444 = 1611.66 - 742.10)
I believe #1 above is a long term gain due to the original purchase date, is #2 also long term? My broker only gave me a 1099B for the fractional share sale, I assume I have to enter a "missing 1099" in my tax software for the $869.56? Did I mess up any of my calculations?

Thanks for the help!

cas
Posts: 266
Joined: Wed Apr 26, 2017 8:41 am

Re: Microfocus tax implications

Post by cas » Tue Apr 10, 2018 3:23 pm

Yes, the Seattle Spinco - Micro Focus Intl merger step made things a bit weird.

As far as I have figured out, the issue with the "capital gains" and the missing 1099-B for that portion, is that the merger was between a US company and a foreign (UK) company. That made the merger *taxable* , so you need to report capital gains on the merger (with a caveat ... next paragraph). It wasn't a "sale" per se ... but a taxable merger. (When a US company merges into a US company, generally the merger is NOT taxable.)

The caveat is that you have to report something on the Form 8949/Schedule D about the merger only if the value of the new Micro Focus ADR shares is larger than your Seattle Spinco cost basis. (So you actually have a capital gain.) (This sounds like your situation.) (Either the HPE or the Micro Focus "tax information" document (I think the HPE one) stated that the value of the Micro Focus to use was $29.34/shr).

If someone had a *loss* then they do NOT report a capital loss ... they are supposed to just reduce their basis by the amount of the loss, but report nothing on their taxes this year.

There was a website having to do with "HP alumni" discussing all this with reference to Micro Focus derived from ESPP shares, and apparently that is a bigger mystery yet.

This, I think, put the brokerages in a bit of a bind for clients who had non-covered shares. Even if you had reported a cost basis for the HPE (or predecessors) to them, they couldn't be 100% sure it was correct, so they couldn't be 100% sure whether they were really supposed to report something on the 1099-B. (If you turned out to have a loss (not supposed to report), but the brokerage had actually put the transaction on the 1099-B, then it would be a mess with a transaction reported to the IRS that should have never been reported.

Vanguard brokerage's decision (as far as I can surmise ... I didn't ask them) was that they didn't put anything on the 1099-B for non-covered Seattle Spinco shares and left it up to the owner to figure out whether there was a reportable transaction or not. (The transaction does appear on the 2017 "realized gains and losses" tab of the "Cost basis summary" page on the Vanguard website, however.)

I reported it on a Form 8949 with the "F" box checked. ("Long-term transactions not reported to you on Form 1099-B.") Don't remember exactly how I did it using Turbotax, but it was something that was obvious to me. (Answering "Do you have any additional stock sales not reported on a 1099-B?" or some such.)

And, then, yes, there was the cash-in-lieu for any partial share of Micro Focus that arose out of all this. (I did have an entry on the 1099-B for that, because that was a true sale where either gain or loss would be reported.)

I have a note written on my spreadsheet to the effect that neither the HPE nor the Micro Focus tax information letters ever explicitly said whether the old acquisition date was supposed to be carried forward. However, the HPE letter said a lot about making sure you went through this "Do I have a gain or a loss?" decision with each lot individually, so I surmise that, yes, the old acquisition date carries forward. (There wouldn't be separate lots any more if the old acquisition dates didn't carry forward.) (Kind of makes sense since it wasn't a "sale/repurchase" per se, but a taxable merger due to one side being a non-US company.) Vanguard brokerage thinks so, too, although I take their opinions on such things with a grain of salt.

Ah, well, that was probably a lot of words for something you have already figured out. But at least you know you have company in this particular aspect of your tax preparation :happy .

cas
Posts: 266
Joined: Wed Apr 26, 2017 8:41 am

Re: Microfocus tax implications

Post by cas » Tue Apr 10, 2018 3:33 pm

abeaver wrote:
Tue Apr 10, 2018 2:11 pm

[*] Sale of 400 shares of Seattle Spin Co with a net 0 capital gain/loss
I didn't check your math, but this is the only sentence that I'm not sure is correct. As far as I have figured out, the "sale" (taxable merger of) the 400 shares of the Seattle Spinco has a net capital gain of $869.56 from your calculations here:
Based on the HPE docs, I should have 2 taxable events from the above transactions.
  1. $2.45 in gains on the fractional share sale (29.75 - 29.34*.930444 (basis))
  2. $869.56 in gains due to the inversion/merger (Share value - original basis = 29.34*54.930444 = 1611.66 - 742.10)

abeaver
Posts: 13
Joined: Mon Oct 25, 2010 1:27 pm

Re: Microfocus tax implications

Post by abeaver » Tue Apr 10, 2018 4:02 pm

@cas, thanks for the reply and of course the company with this oddity.

Everything you said makes sense up until your most recent reply.
cas wrote:
Tue Apr 10, 2018 3:33 pm
abeaver wrote:
Tue Apr 10, 2018 2:11 pm

[*] Sale of 400 shares of Seattle Spin Co with a net 0 capital gain/loss
I didn't check your math, but this is the only sentence that I'm not sure is correct. As far as I have figured out, the "sale" (taxable merger of) the 400 shares of the Seattle Spinco has a net capital gain of $869.56 from your calculations here:
Based on the HPE docs, I should have 2 taxable events from the above transactions.
  1. $2.45 in gains on the fractional share sale (29.75 - 29.34*.930444 (basis))
  2. $869.56 in gains due to the inversion/merger (Share value - original basis = 29.34*54.930444 = 1611.66 - 742.10)
The strangeness for me is that my broker reported a sale on a 1099B for the Seattle Spin Co shares with a $0 basis. I guess one way of handling the gain I mentioned is to adjust what they report as the basis? I think you were in a better state because Vanguard decided not to report.

cas
Posts: 266
Joined: Wed Apr 26, 2017 8:41 am

Re: Microfocus tax implications

Post by cas » Tue Apr 10, 2018 4:33 pm

abeaver wrote:
Tue Apr 10, 2018 4:02 pm
@cas, thanks for the reply and of course the company with this oddity.

Everything you said makes sense up until your most recent reply.

<skip>

The strangeness for me is that my broker reported a sale on a 1099B for the Seattle Spin Co shares with a $0 basis. I guess one way of handling the gain I mentioned is to adjust what they report as the basis? I think you were in a better state because Vanguard decided not to report.
Ah, well, there were so many discrete, simultaneous steps while Seattle Spinco morphed into Micro Focus Intl ADRs that exactly which one was taxed how might be debatable:

- HPE spins off Seattle Spinco, the shares of which never publicly traded. (this step was definitely tax free)
- Seattle Spinco merges into Micro Focus Intl, a UK company
- American Depository Receipt (ADR) shares of Micro Focus are issued to US holders of the former Seattle Spinco.

I suspect the important thing is to get the $869.56 in gains onto your Schedule D one way or another and be able to explain your reasoning to the IRS, should they ask, which they likely will not.

abeaver
Posts: 13
Joined: Mon Oct 25, 2010 1:27 pm

Re: Microfocus tax implications

Post by abeaver » Tue Apr 10, 2018 5:01 pm

cas wrote:
Tue Apr 10, 2018 4:33 pm
Ah, well, there were so many discrete, simultaneous steps while Seattle Spinco morphed into Micro Focus Intl ADRs that exactly which one was taxed how might be debatable:

- HPE spins off Seattle Spinco, the shares of which never publicly traded. (this step was definitely tax free)
- Seattle Spinco merges into Micro Focus Intl, a UK company
- American Depository Receipt (ADR) shares of Micro Focus are issued to US holders of the former Seattle Spinco.

I suspect the important thing is to get the $869.56 in gains onto your Schedule D one way or another and be able to explain your reasoning to the IRS, should they ask, which they likely will not.
Agreed, that seems to be what would be most important. I also think I need to report the two $0 basis transactions just so they line up with what the broker reported even if that isn't needed. Who knows, maybe I'm worrying too much about this. I just wish HP/HPE would make their various changes easier to follow!

kaneohe
Posts: 4688
Joined: Mon Sep 22, 2008 12:38 pm

Re: Microfocus tax implications

Post by kaneohe » Tue Apr 10, 2018 5:43 pm

abeaver wrote:
Tue Apr 10, 2018 2:11 pm
..................................................

Starting out with 400 shares of HPE, cost basis $3,360.98, purchase date 01/01/2000.

..................................................
If you bought HP shares on 1/1/2000 (seems doubtful the market was open that day) or close to there, you have some other events to contend with: Agilent spinoff, HPE/HPQ spinoff, HPE/DXC spinoff before you get to Microfocus. This means that your HPE basis is lower than you think and your gain on Microfocus is higher than you think.

wrongfunds
Posts: 1313
Joined: Tue Dec 21, 2010 3:55 pm

Re: Microfocus tax implications

Post by wrongfunds » Tue Apr 10, 2018 5:48 pm

Starting out with 400 shares of HPE, cost basis $3,360.98, purchase date 01/01/2000.
I don't think there was HPE on 1/1/2000 aka it did not exist.

Regardless I am in similar situation but my cost basis is from DEC->CPQ merger which happened in Jun 1998. Even after googling, I am not able to find the exact date and CPQ price on that date. At least I have found the formula.

I also believe that as far as IRS is concerned, all it really cares is if your purchase date is before 1/1/2012 for covered vs uncovered and also if it is short term or long term. The actual purchase date itself will be immaterial as long those parameters are adhered to.

I actually have HPE shares at different brokerage houses and one of them did not even say a thing about Seattle Spin Co

cas
Posts: 266
Joined: Wed Apr 26, 2017 8:41 am

Re: Microfocus tax implications

Post by cas » Tue Apr 10, 2018 6:54 pm

wrongfunds wrote:
Tue Apr 10, 2018 5:48 pm

I don't think there was HPE on 1/1/2000 aka it did not exist.
No, but (original) HP (and Compaq ... acquired by (original) HP in a non-taxable merger in 2002) existed, and if HP (or Compaq) was purchased (around) that date, then held, it would have eventually spun off HPE (in 2015) in a non-taxable spin-off where the acquisition date for the (new) HPE shares was carried forward from the (original) HP lot.

So, somebody looking at the brokerage statement in 2017/2018, trying to figure out the Micro Focus Intl stuff could easily see a line that said they had a lot of HPE with an "acquisition date" in 2000. That just means that HPE's "ancestor" (probably HP or Compaq shares) was bought then. In other words, in 2017 or 2018, HPE could exist in someone's portfolio with an "acquisition date" in 2000 without having actually itself, as HPE, been bought as HPE shares in 2000.

cas
Posts: 266
Joined: Wed Apr 26, 2017 8:41 am

Re: Microfocus tax implications

Post by cas » Tue Apr 10, 2018 8:13 pm

wrongfunds wrote:
Tue Apr 10, 2018 5:48 pm

Regardless I am in similar situation but my cost basis is from DEC->CPQ merger which happened in Jun 1998. Even after googling, I am not able to find the exact date and CPQ price on that date. At least I have found the formula.
I'll agree with you that the official "tax information" document that Compaq would have out for the DEC-Compaq acquisition/merger seems to be missing from google's knowledge.

Do you still have your 1998 tax return? Your schedule D (and any associated forms that were associated with it in 1998) should give a hint on how you treated the merger.

I don't know that this is what happened, but the most usual treatment of a US company to US company merger is than any cash is from the merger is treated as a dividend (or capital gain with $0 cost basis assigned to it). (The exception would be if it was a 100% cash buyout of existing shareholders, which DEC-Compaq doesn't appear to have been.) Then the merger itself would be tax-free, with the DEC shares multiplied by an allocation factor to get the new # of Compaq shares. Google found news stories from the time that gave the allocation factor. I'm sure you found those.

Assuming a tax-free merger (again, I don't know that it was, but that is the most common type I've seen for US-to-US mergers), the cost basis from DEC shares would be carried forward to the new Compaq shares. (No need to know the Compaq share price on the merger date.) The acquisition date(s) of the DEC shares would also be carried forward to the Compaq shares. The slight fly in that ointment would the the cash-in-lieu received instead of a partial share, which needed to be reported on Schedule D for that year. Some small part of the cost basis might have been allocated to that that sold partial share. If it was, the new Compaq cost basis needed to be reduced by that amount. But $0 might have been used as the cost basis for the sold partial share as well. The 1998 tax return would tell the story.

Going forward from there, as kaneohe said, there are a lot of other twists and turns in the cost basis saga before the formerly-DEC-now-Compaq shares get to HPE and Micro Focus. The tax implication documents, which contain the share # and cost basis allocation percentages, seem to exist on the web for all of those.

But you may have known all that already.

wrongfunds
Posts: 1313
Joined: Tue Dec 21, 2010 3:55 pm

Re: Microfocus tax implications

Post by wrongfunds » Tue Apr 10, 2018 8:36 pm

I do remember paying taxes on DEC-CPQ but the formula was $30 + 0.945 of CPQ exchanged per DEC stock. Google research shows CPQ price of $27.07 being used in some case study. So the $30 was taxable immediately either as short term or long term based upon the original DEC purchase price.

Assuming 1000 DEC shares with average purchase price of $20 and average purchase date at least 2 years before the merger.

The cost of DEC shares $20,0000

Merger consideration $58,580 (based upon the above formula)

Taxable gains $30,000 aka the received cash value

Cost Basis to take forward for the #946 CPQ shares = $28,580

Then on 5/3/2002 CPQ becomes 0.6325HPQ

Cost basis to take forward for the #598 HPQ shares = $28,580

HPQ splits in to HPE and HPQ; then there is DXC, then there is Microfocus etc but all of that combined will add up to the original cost basis.

Can somebody take it from here?

wrongfunds
Posts: 1313
Joined: Tue Dec 21, 2010 3:55 pm

Re: Microfocus tax implications

Post by wrongfunds » Tue Apr 10, 2018 8:58 pm

I think I have done it completely wrong. I need to redo my example.

investor4life
Posts: 85
Joined: Fri Oct 08, 2010 9:45 am

Re: Microfocus tax implications

Post by investor4life » Tue Apr 10, 2018 9:07 pm


wrongfunds
Posts: 1313
Joined: Tue Dec 21, 2010 3:55 pm

Re: Microfocus tax implications

Post by wrongfunds » Tue Apr 10, 2018 9:38 pm

Thank you for that link. But Oh my God, what a mess! I joined this train via DEC/CPQ, so at least I am saved from the Agilent branch of the family tree!

My example needs to be redone. As long as the total profit is more than the cash received, the cost basis of the new security stays the same. Only when the cash is more than the total profit, the basis gets stepped up by the difference.

In any case, without knowing the actual original cost of original securities purchased about 25 years ago, it is futile to guesstimate. I will just let IRS have my pound of flesh by keeping the cost zero for 1099-B and pay the extra tax.

cas
Posts: 266
Joined: Wed Apr 26, 2017 8:41 am

Re: Microfocus tax implications

Post by cas » Wed Apr 11, 2018 6:16 am

wrongfunds wrote:
Tue Apr 10, 2018 9:38 pm
In any case, without knowing the actual original cost of original securities purchased about 25 years ago, it is futile to guesstimate. I will just let IRS have my pound of flesh by keeping the cost zero for 1099-B and pay the extra tax.
Once the IRS gets your pound of flesh for the Micro Focus, keep in mind that since the Micro Focus was a taxable merger, the mild silver lining for you is that you get a clean slate for the cost basis of the Micro Focus. The Micro Focus cost basis is no longer linked to the original (unknown) DEC cost basis, but got a step up to $29.34/share.* Make sure you update your cost basis records (and check that your brokers updated their cost basis records for the Micro Focus correctly, if they track cost basis for non-covered shares.) You don't want the IRS to get your pound of flesh a second time when/if you sell the Micro Focus shares.

*Sources: the "tax implication" guidance from HPE and Microfocus:
http://investors.hpe.com/~/media/Files/ ... 092017.pdf (page 5)

https://investors.microfocus.com/media/ ... -10317.pdf (also page 5)

kaneohe
Posts: 4688
Joined: Mon Sep 22, 2008 12:38 pm

Re: Microfocus tax implications

Post by kaneohe » Wed Apr 11, 2018 7:09 am

wrongfunds wrote:
Tue Apr 10, 2018 9:38 pm
Thank you for that link. But Oh my God, what a mess! I joined this train via DEC/CPQ, so at least I am saved from the Agilent branch of the family tree!

My example needs to be redone. As long as the total profit is more than the cash received, the cost basis of the new security stays the same. Only when the cash is more than the total profit, the basis gets stepped up by the difference.

In any case, without knowing the actual original cost of original securities purchased about 25 years ago, it is futile to guesstimate. I will just let IRS have my pound of flesh by keeping the cost zero for 1099-B and pay the extra tax.
doesn't exactly help you since I joined via the HP/Agilent branch but might be similar:
1)HP/A spinoff.......HP took 80.5% of basis
2)HPQ/HPE spinoff......HPE took 52.9% of the basis in 1)
3)HPE/DXC spinoff.......HPE took 75.1% of the basis in 2)
4)HPE/Seattle Spin spinoff.....MicroFocus.......MicroFocus took 22.1% of the basis in3)

net result is that MicroFocus basis is .805 x .529 x .751 x .221 = .0707 = 7.07% of original yr 2000
HP basis which is somewhat "similar" to cost basis of 0.

I don't know what you mean by your 2nd paragraph.....but cas is correct. This is a fully taxable merger so new basis for MicroFocus is issue value (step up in basis).

kaneohe
Posts: 4688
Joined: Mon Sep 22, 2008 12:38 pm

Re: Microfocus tax implications

Post by kaneohe » Wed Apr 11, 2018 7:15 am

wrongfunds wrote:
Tue Apr 10, 2018 9:38 pm
Thank you for that link. But Oh my God, what a mess! .............................
These things do have a way of getting out of hand.......think ATT breakup. The thing to remember is that although the big picture has a seemingly infinite number of things going on,
it is "simply" the accumulation of a number of steps, each of which can be understood.
The important thing is to know what those individual steps are.

abeaver
Posts: 13
Joined: Mon Oct 25, 2010 1:27 pm

Re: Microfocus tax implications

Post by abeaver » Wed Apr 11, 2018 6:53 pm

cas wrote:
Tue Apr 10, 2018 6:54 pm
wrongfunds wrote:
Tue Apr 10, 2018 5:48 pm

I don't think there was HPE on 1/1/2000 aka it did not exist.
No, but (original) HP (and Compaq ... acquired by (original) HP in a non-taxable merger in 2002) existed, and if HP (or Compaq) was purchased (around) that date, then held, it would have eventually spun off HPE (in 2015) in a non-taxable spin-off where the acquisition date for the (new) HPE shares was carried forward from the (original) HP lot.

<skipped>
Nailed it! My connection to this train was HP back in 01/04/2000. I accidentally put 1/1/2000 in my original post.

abeaver
Posts: 13
Joined: Mon Oct 25, 2010 1:27 pm

Re: Microfocus tax implications

Post by abeaver » Wed Apr 11, 2018 6:56 pm

kaneohe wrote:
Wed Apr 11, 2018 7:09 am
doesn't exactly help you since I joined via the HP/Agilent branch but might be similar:
1)HP/A spinoff.......HP took 80.5% of basis
2)HPQ/HPE spinoff......HPE took 52.9% of the basis in 1)
3)HPE/DXC spinoff.......HPE took 75.1% of the basis in 2)
4)HPE/Seattle Spin spinoff.....MicroFocus.......MicroFocus took 22.1% of the basis in3)

net result is that MicroFocus basis is .805 x .529 x .751 x .221 = .0707 = 7.07% of original yr 2000
HP basis which is somewhat "similar" to cost basis of 0.

I don't know what you mean by your 2nd paragraph.....but cas is correct. This is a fully taxable merger so new basis for MicroFocus is issue value (step up in basis).
Wasn't the HP/A spinoff 78% HP, 22% A?

kaneohe
Posts: 4688
Joined: Mon Sep 22, 2008 12:38 pm

Re: Microfocus tax implications

Post by kaneohe » Wed Apr 11, 2018 7:36 pm

abeaver wrote:
Wed Apr 11, 2018 6:56 pm
kaneohe wrote:
Wed Apr 11, 2018 7:09 am
doesn't exactly help you since I joined via the HP/Agilent branch but might be similar:
1)HP/A spinoff.......HP took 80.5% of basis
2)HPQ/HPE spinoff......HPE took 52.9% of the basis in 1)
3)HPE/DXC spinoff.......HPE took 75.1% of the basis in 2)
4)HPE/Seattle Spin spinoff.....MicroFocus.......MicroFocus took 22.1% of the basis in3)

net result is that MicroFocus basis is .805 x .529 x .751 x .221 = .0707 = 7.07% of original yr 2000
HP basis which is somewhat "similar" to cost basis of 0.

I don't know what you mean by your 2nd paragraph.....but cas is correct. This is a fully taxable merger so new basis for MicroFocus is issue value (step up in basis).
Wasn't the HP/A spinoff 78% HP, 22% A?
Yes, from the docs I found now. Not sure how I got a sl different number.....try to get it from
some SEC document but I couldn't find that now just the ones from A/HP. Thanks for the catch.

abeaver
Posts: 13
Joined: Mon Oct 25, 2010 1:27 pm

Re: Microfocus tax implications

Post by abeaver » Wed Apr 11, 2018 7:39 pm

kaneohe wrote:
Wed Apr 11, 2018 7:36 pm
Yes, from the docs I found now. Not sure how I got a sl different number.....try to get it from
some SEC document but I couldn't find that now just the ones from A/HP. Thanks for the catch.
No worries. I was wondering if you used another method to split the basis!

kaneohe
Posts: 4688
Joined: Mon Sep 22, 2008 12:38 pm

Re: Microfocus tax implications

Post by kaneohe » Wed Apr 11, 2018 9:11 pm

Apparently there is some leeway here: http://www.costbasis.com/stkchanges/spinoffs.html
"You are allowed by the IRS to use the opening price, the average price, the closing price, or the trade-volume-weighted average price on the first day of separate trading to compute the cost allocation factors. Most people use the closing price for simplicity. Where the company has provided guidance in the form of a tax information statement, we have tried to use the company's factors in the spinoff database. "

The average price (H+L)/2 sounds vaguely familiar but not sure that's what I used. Needs more work.

libralibra
Posts: 140
Joined: Sat Jul 30, 2011 2:01 pm

Re: Microfocus tax implications

Post by libralibra » Mon Apr 16, 2018 1:27 pm

abeaver wrote:
Tue Apr 10, 2018 2:11 pm
Starting out with 400 shares of HPE, cost basis $3,360.98, purchase date 01/01/2000.
Double check your basis - HP hit an all time high around Jan 2000, so if you bought in the open market, it was about ~110 a share. For 200 shares (which split to 400 later) that would be 22k, times ~7% equals a basis closer to $1500 than $742 for your 400 SpinCo shares.

Also, if the basis is even higher than the merger value, then those lots retain their old basis instead of getting a new lower basis using the 29.34 FMV. No gain or loss would be reported in that case (except for any fractional shares sold, which should be reported using the old basis).

Post Reply