Lesson 5 of 6
Tax on a corporate action
A spin-off, a merger or a tender changes what you hold and what it cost. The company files the allocation, and Form 8937 is where that number lives.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A corporate action changes the shares you hold, and something has to happen to the basis attached to them.
- The company, not the broker, determines the allocation, and it publishes it.
- Form 8937, Report of Organizational Actions Affecting Basis of Securities, is the document that carries that number.
One morning a holding becomes two holdings, or becomes cash, or becomes shares in a different company. Whatever else has happened, the basis that was attached to the original position has to go somewhere, and a number has to be found.
Three corporate actions and what each does to a holding
- 1Spin-offOne holding becomes two; the original basis is split between them
- 2MergerShares become cash, or shares in the acquirer, or both
- 3Tender offerShares are sold to the bidder, which is a sale
- 4The company publishes the allocationOn Form 8937, because nobody else can compute it
Why a number has to be found at all
In a spin-off, a shareholder who owned one company now owns two. Nothing was bought and nothing was sold, so the original basis has not gone away. It has to be divided between the parent and the spun-off company, and the division has to be based on something.
The something is a relative value at the time of the separation, and only the company is in a position to state it. A broker cannot compute it, and a shareholder certainly cannot.
The filing that carries it
What the structure decides
Whether a shareholder has a taxable event at all depends on how the transaction was structured. Broadly, and only broadly:
A separation structured to qualify as a reorganisation generally does not create an immediate event for the shareholder; basis is reallocated instead. A transaction that delivers cash generally does. A mixed deal, part cash and part shares, is treated as a mix.
The exact treatment of any particular deal is a matter of that deal's structure and the current rules, and this lesson does not tell anyone which category their holding fell into. The company's own filings say.
The practical reading habit
Three steps, none of which is advice.
Read the 8-K. A material corporate action is announced there, usually with the terms.
Find the Form 8937. It is normally on the company's investor relations site, and sometimes filed as an 8-K exhibit. It carries the allocation percentages.
Check what the broker did with it. Brokers apply these allocations, usually correctly and sometimes late. The company's own number is the one to reconcile against, and it is public.
Why an investor cares beyond the tax
The same allocation that matters for basis also tells you what the market thought each piece of a separated company was worth at the moment of separation. That is a figure produced by the transaction itself rather than by anybody's model, and it is in a public filing. The tax mechanics are the reason it exists; the reading is useful either way.
Check yourself
After a spin-off, where does the original holding's basis go?
- It stays entirely with the parent
- It is divided between the parent and the spun-off company
- It resets to the market price on the day of separation
Show the answer
Answer: B.
Nothing was bought or sold, so the basis has not disappeared. It is allocated between the two holdings, on a division the company determines and publishes.Which document carries the basis allocation for a corporate action?
- The broker's annual statement
- Form 8937, Report of Organizational Actions Affecting Basis of Securities
- The company's 10-K
Show the answer
Answer: B.
The company files the 8937 because only the company can determine the allocation. Brokers then apply it, which is why the company's own number is the one to reconcile against.A merger delivers cash for your shares. What has happened mechanically?
- Nothing until you reinvest the cash
- The shares were disposed of, which is a sale
- The basis transfers to the acquirer's shares
Show the answer
Answer: B.
Receiving cash for shares is a disposal. Basis transfers instead of a disposal happening only where shares are received and the transaction is structured so that it does, which is what the company's filings state.Sources
- American Software, Inc, current report on Form 8-K, exhibit EX-99.1, accession 0001628280-21-000684, filed 20 January 2021: a company announcing a basis-affecting distribution and directing holders to its Form 8937.
- Form 8937, Report of Organizational Actions Affecting Basis of Securities: the title as it appears in that filing. SEC full-text search returns 53 further 8-K filings using the same title, confirming it as the routine vehicle for these allocations.
- IRS Publication 550, Investment Income and Expenses, and IRS Publication 551, Basis of Assets: the general treatment of basis through corporate actions.
What this leaves out
- This is not tax advice. It describes general US mechanics at a high level. Rules differ by country, by state, by account type and by individual circumstance, and they change.
- No code section is named here, deliberately. Whether a particular transaction qualifies for any particular treatment depends on that deal's structure and the current rules, and that determination belongs with a qualified adviser and the company's own filings.
- The three-way description of spin-offs, mergers and tenders is a simplification. Real transactions combine these forms and carry terms this lesson does not cover.
- Nothing here is advice about any security.