Ford Recapitalization - Part Cash Option
Ford Recapitalization - Part Cash Option
This is part of a continuing series on mergers, spin-offs, and stock splits. In early August of 2000, Ford Motor Company completed a recapitalization/merger plan. Under this plan, a shareholder could exchange stock for 1.748 shares of new Ford stock, or could receive 1 new share of Ford stock, plus $20 a share. A third option was to receive a combination of new Ford stock and cash. The first option [all stock] was a non-taxable reorganization. The other two options have tax ramifications. We covered the All Stock Option in a previous article, which can be found at http://www.bivio.com/trez_talk/mail-msg?t=3785300003
In this article, we will deal only with the options that include cash.
Readers are urged to look at two public files in Trez_talk for more information. These file can be found at http://www.bivio.com/trez_talk/files/stocks/f-recapitalization.rtf and http://www.bivio.com/trez_talk/files/stocks/f-taxinfo.pdf
Before making any entries for this stock for stock recapitalization, it is very important that you do two things:
Now we can enter the stock for stock plus cash recapitalization. It might be important to see the overall picture before we delve in to the intricacies of making the necessary entries. First we have to compute the gain, if any, on the transaction. This gain is computed by computing the value of the stock received [call it New Stock]. This stock will be valued at $26.4375 a share. So multiply all the Ford shares received times $26.4375. Add to that figure any cash received [at $20 per each old Ford share]. The total of these two figures will be the Sales Price in computing the gain, if any, on this transaction. Deduct from this figure the Cost Amount, which will be the total cost basis of the old Ford shares. As stated before, be sure that you have accounted for the Visteon spin-off before doing this. If your Cost Amount exceeds the Sales Price, you have a loss on this transaction, and thus do not have to report any part of the cash received as income. If, on the other hand, you have a gain, then you will have to report the lesser of such gain, or the cash received. Call this figure Reportable Gain.
To record this transaction, we will have to reduce the total tax basis of the old stock by the amount of cash received. Then we will increase the total tax basis by any gain reported. The holding period for the new stock will be the same as for the old stock.
Alright. We know what we want to accomplish. Here is how we will do it. NCA users should be able to follow these bivio instructions without difficulty. Go to Accounting|Investments. Select Ford. Click on the Income Icon. Select Return Of Capital. Enter the total cash received. Enter a remark, if desired, and click OK.
Now we have to enter the portion of the cash distribution that is Reportable Gain. If your above calculation resulted in a loss, you are through, and don't have to complete the rest of these steps. If, on the other hand, you had a Reportable Gain, go to Accounting|Investments and select Ford. Select the Income Icon. Since we are entering what is really a non-cash item, I suggest that you select Suspense for the account. Enter the Reportable Gain, either as Long-Term or Short-Term, depending on how long you have held your original Ford shares. Click on OK.
Now, we must offset the above recorded gain by an offsetting adjustment to the tax basis of the Ford stock. Again, go to Accounting|Investments and select Ford. Again, I would suggest that you select Suspense for your account. It is extremely important that you select the same account that you did for the transaction that was immediately prior to this. In the Return of Capital box, enter a NEGATIVE amount equal to the Reportable Gain. Do this by putting a minus sign before the amount. Click on OK.
Whew!! You're done. I can hear the groans and complaints now, like
Come on. Do we really have to go through all that? That's great for you accounting nerds, but we shouldn't have to be put through all that.
Well, yes, unfortunately, you do have to go through all that. I really don't make these rules up. Ford has engineered a very creative and complicated transaction here. It appears that there will be more of the same nature by other companies. It is complex, but if you follow the instructions exactly, you will report it correctly.
As always, comments and questions are welcome.
Saint Paul, MN