Does anyone know how to figure taxes on converted EP stock? Suppose I started with 10,000 shares of EP that I purchased at $15.00 in 2009 and went with the "mixed election" so that I ended up with 4,187 shares of KMI, $146,500 cash, and 6400 warrants. Also suppose that KMI was worth $32.29 and warrants were worth $1.90 at the close of the deal. Suppose that I don't sell anything in 2011. What do I owe in 2011 taxes as a result of this transaction?
I'm hoping that the answer is that I don't owe anything in 2011 taxes, since the cash, and possibly the value of the warrants, might be considered return of capital. In such a case, I would pay capital gains taxes only when I sold the KMI stock, but I would have to reduce my basis by the return of capital amount.
I'm thinking it might also be possible that I'll have to pay 2011 capital gains taxes on the cash portion, or maybe on both the cash and warrant portions?
Does anyone know exactly how to figure the taxes owed in 2011?
We are not buying or selling cash here. There is no reason to think of having any kind of basis in cash. Its a medium of exchange. The basis applies to the securities. Cash is a factor in determining the basis.
I'm sure you are correct in what you meant, but not technically in what you wrote. This can get quite confusing. Keep it simple. See my examples elsewhere here. Let me know if I am wrong.
Page 180 of the 1/31/12 merger prospectus: The adjusted tax basis of the KMI stock and warrants will equal your adjusted basis in the EP stock you surrender, reduced by the amount of cash received, and increased by the amount of gain, if any, recognized by you on the exchnge.
Using Cappy's numbers from above, this would be: $150,000 basis in EP, less $146,500 of cash received, and increased by the $143,858 of gain recognized. This amounts to a $147,358 adjusted basis in the KMI stock and warrants. This amount also happens to equal the FMV of the KMI stock and warrants received (in the above example).
This adjusted basis will be allocated between the KMI stock and the KMI warrants based on their relative FMVs, probably as of 12:01 AM, 5/25/12. I don't know how practical it will be to try to get FMV's as of that hour. Numbers will be bandied about, I am sure. FMV's on the day the stock and warrants hit your account should be acceptible as well. Who is going to prove you wrong? There'd have to be an audit, and it probably won't change your tax liablilty one nickle if the IRS tried to rejigger your basis allocations.
Read page 172 - 174 of the Prospectus Dated March 23, 2012 or page 179 - 181 of the earlier prospectus. For the more recent version, you might jump in on the bottom of page 172 and continue on the top of page 173 to the end of the paragraph. The only problem with the method is that it is not the usual total value received minus your cost if you have the less choice of the $14.65. So I would try to add $14.65 to your cost and show that as the amount received so it comes out to a $14.65 gain. If you paid a fee to your broker for the choice you would have to also deduct that from the total gain.
I think I just didn't make myself clear. I was trying to say that our original basis for EP gets prorated to all 3 things received; KMI stock, KMI warrants, and the cash.
I did say "..the other half to the taxable event of the cash received.." and by that I meant that all of the cash received will be a taxable event.
Others have suggested that all of the original EP basis will be considered as the 'cash received' basis for tax purposes. IMHO, only a portion of my original EP basis will be allocated as the basis for the cash and that allocation will most likely be supplied by KMI upon the distribution.
Whew; I'm not sure I made myself clear this time either!
Keep in mind whatever tax a long term holder pays is 15%. Really not that painful.
We cannot assume that taxes on gains will be so generous in 2013 and beyond.
So we may be forced into a wise decision.
Of course short term traders knew the deal going in. I suppose someone could have purchased 11 months ago and believed they were avoiding short term capital gains.
Yes this group has suffered the random risk of equity investing. Yet what a nice gain they have had in this short period of time! They too have done nicely in this deal. Even after taxes there is no reason feel sad.
I believe you're wrong. The cash portion is totally taxable. The cost basis of your EP position gets applied to KMI shares and warrants received on a proportional basis. We get screwed on taxes because of the cash payment and the proration limitations on share issuance making that a significant issue.
I had a buyout similar to this and the company put out instructions for the allocation of basis about a week after the close. Briefly, we were instructed to allocate a percentage of our original basis to the new shares and the remainder to the cash portion.
In this example we are using for Cappy, and using EPholders figures,it appears that the total of KMI shares and warrants is about half of the total value received. The cash recieved is about half of that total also.
So my guess is that 1/2 of Cappys original basis will be allocated to the cash and the rest split between the shares and the warrants, with the stock shares obviously taking the bulk of the allocation there.
If that happens, about half of his original basis will carry forward to the new shares and warrants and the other half to the taxable event of the cash received. I'm just rounding for discussion's sake. When we got instructions on my other buyout they issued exact percentages out to the hundreths.
I also hope for everyones sake that KMI issues clear instructions and doesn't chicken out with a "contact your own tax advisor" disclaimer.
See page 11 of the merger prospectus. Your 4,187 KMI shares at $32.29/share have a fair market value of $135,198 and your 6,400 warrants at $1.90 have a total FMV of $12,160, for a combined total FMV received of $147,358.
Your basis in the EP shares is $150,000. Your basis exceeds the value you received, so you have no gain to recognize. No loss is deductible either.
The Q&A in the prospectus doesn't say how to allocate basis to the KMI stock and warrants. Maybe divide $12,160 by $147,358 to get 8.25% of the $150,000 basis assigned to the warrants. Thus, $12,375 basis in the warrants, and the remaining %137,625 basis in the KMI shares.
I forgot to add the $146,500 of cash to the $147,358 FMV received. They total $293,858 less your $150,000 basis equals a $143,858 gain. The amount of cash you received is greater than the gain, so all of your gain is reconized.
How could I be so wrong in my original post?
You will be paying taxes on the cash received. Your broker's statement will have all the details and what you have to report due to the new tax laws. Your broker is required to report all these details as of 2011.
Warning &/or fyi - you need to verify the calculations of tax gain or loss, and KMI cost basis that your broker reports. I've had errors in my brokers calcs with previous acquisitions that closed in 2012. The broker claims that they are having difficulty due to the 2012 reporting changes required of them. Been working with them since Feb of this year, and it is still in the process of being corrected.