Booyah Breakdown: Wall Street Weddings

Next, is it taxable?

If the deal is taxable, you'll owe capital gains taxes on the fair market value of the new shares you get, minus your basis. So in our example, you'll owe tax on the difference between the current share price and your basis of $12.50.

If the deal is tax-free, you'll still have to readjust your basis, but you won't have a tax bill until you sell those new shares. That's why a tax-free deal is much better for investors -- it allows them more control over their tax situation. Another tax-free perk is that your holding period is carried over. So if you bought your original shares two years ago, it will be assumed that you've been holding the new shares for two years as well.

The Not-So-Straightforward Deals

But not all deals are that simple. Take the Host Hotels (HST Quote) deal. In April 2006, Host Hotels, then known as Host Marriott, paid $4 billion to buy 38 luxury and upscale hotels from Starwood Hotels and Resorts Worldwide(HOT Quote).

The problem is that some of the Starwood shares were considered "special" and represented two separate securities, according to Stevie D. Conlon, senior tax analyst for CCH Capital Changes, a company that provides coverage of corporate actions affecting publicly traded companies

Dubbed the HOT shares, each of these special HOT shares represented a piece of Starwood Worldwide and a piece of the company's REIT. So you actually got two things for the price of one. The problem was that Host Hotels bought only the REIT portion of that share. So shareholders now have to separate their basis in that HOT share between the Starwood Worldwide piece and the REIT. Holy tedious. Oh, and shareholders will have to recalculate their basis by April 16, 2007, because the transaction will need to be reported on their 2006 tax return.

And the kicker: The deal is fully taxable to shareholders. Ugly.

But it gets worse. Alberto-Culver (ACV Quote), the company that makes Alberto V05 shampoo, wanted to separate its consumer products business and its retail business into two separate publicly traded companies through a tax-free transaction, according to Conlon. And as part of this complicated transaction, it decided to pay each shareholder a whopping $25 dividend. Very cool, right?

Not so much. Thanks to onerous tax rules, no one knows how to tax this distribution. Is it ordinary income taxed at your regular tax rate? Or is it a capital gain distribution, subject to the lower 15% rate? Who knows? And no one will know until 2008. That's right, 2008 -- when the company finalizes its 2007 year-end numbers.

So for now, shareholders have to report the whole dividend as ordinary income on their 2006 tax returns, says Conlon. But odds are very good that they will all have to amend those returns in 2008 when the company finally figures out how much of that dividend will be taxed at the capital-gains rate.

I'm not kidding. This stuff is nuts.

Call the Wedding Singer

So how do you figure all this out? Well, you can read the proxy statement. It will help you figure out your basis in your shares, although I think it would be easier to read Leo Tolstoy's War and Peace in Russian.

You could call your broker or the company's investor relations department and try to have them help you. Or you can get your trades in a program that will recalculate your basis for you. I've said this before, but I think GainsKeeper is the way to go. Just download your trades from your broker, and it will take care of all this minutiae for you, says Chuck Ross, GainsKeeper's general manger. That includes spinoffs, reinvested dividends and other complicated basis calculations.

For $59 a year, you can input 150 trades, and for $159 you've got up to 1,000 trades. Or you can go with the unlimited trading for $659, starting Jan. 29, 2007, according to Ross.

So enjoy the wedding circuit down on Wall Street. The guests are always dressed to impress. Just make sure you understand the many nuances of these marriages.