It seems to be official that the merger of pse into pxd will generate a huge tax bill for those of us with near
zero cost basis. I bought pse when it was first issued and the distributions over the last 5 years have reduced my basis to almost 0. Here is the text from the merger agreement.
Federal Income Tax Consequences of the Merger.
Tax matters associated with the merger are complicated. Under current law, it is anticipated for U.S. federal income tax purposes that Pioneer Southwest unitholders generally will recognize gain with respect to the exchange of Pioneer Southwest common units for shares of Pioneer common stock in the merger in an amount equal to the excess of (1) each Pioneer Southwest unitholder’s “amount realized” for U.S. federal income tax purposes, which equals the sum of the fair market value of the shares of Pioneer common stock received, plus the unitholder’s allocated share of Pioneer Southwest’s pre- merger liabilities (it being understood that no Pioneer Southwest unitholder bears any personal responsibility or liability in respect of such allocated liabilities), over (2) the unitholder’s aggregate adjusted tax basis in Pioneer Southwest common units (including basis attributable to the unitholder’s share of Pioneer Southwest’s pre-merger liabilities). Pioneer Southwest unitholders generally will recognize loss to the extent that the amount of their basis described in clause (2) above exceeds the amount realized described in clause (1) above. A portion of any amount realized by a unitholder will be treated as income subject to U.S. federal income tax at ordinary rates (up to 39.6% under current law) rather than capital gains rates due to the operation of the recapture rules applicable to depreciation, depletion and intangible drilling cost deductions allocable to the Pioneer Southwest unitholders, even if the Pioneer Southwest unitholder’s aggregate adjusted basis in Pioneer Southwest common units exceeds the amount realized in the exchange
There will be a significant tax bill, however I'd be surprised if your cost basis were really close to zero. Are you sure you are taking into account that positive numbers in box 1 of your K-1s increase the cost basis? Distributions decrease the cost basis however positive numbers from boxes 1-11 increase it. I think PSE generated significant box 1 income.
Anyway, the full liability will be on the K-1 sales schedule which we will get in 2014 (assuming the merger completes in 2013).
My cost basis after the October distribution will be $2.63 per share. And I took into account the ordinary income reported in box 1. Since I own 6000 shares my federal tax will be about $38,000 and state tax about $19,000 if the merger goes through this year. Ouch...