Thanks to the automaker's
recapitalization plan, Ford will swap its current common stock. Shareholders have the option of taking all new common stock or a combination of stock and cash.
Ford needs to receive your election documents by 8:30 a.m. on Aug. 2. But some brokerage houses have set earlier deadlines, notes Karen Hampton, Ford's spokeswoman. So call your broker and get the skinny. The proxy material includes the addresses you'll need to mail your election.
As a recap, Ford will exchange its common and Class B shares for new Ford common and Class B shares. Your holding period for the new Ford shares, meaning the amount of time you held the shares, will be considered the same as that of your original Ford shares. Why does that matter? If you've held the shares for at least 12 months, your holding period is long term, meaning you qualify for the 20% preferential capital-gains rate when you sell.
Under this recapitalization plan, shareholders can elect to take all stock or a combination of cash and stock. (There was an
all cash option, but the company decided to get rid of it at the end of June.)
Here are your options:
- Option 1: One share of new stock plus $20 in cash. (This is the default option if you fail to submit an election.)
- Option 2: All stock. (You'll actually receive one whole share and a partial share worth $20.)
- Option 3: One share of stock plus a combination of cash and new common stock with a total value of $20. With this option, it's likely you'll get most of that $20 in stock.
Regardless of your election, you'll get a new Ford share for every share you hold. "But you must decide how you want the $20," notes Hampton.
"Determining your basis in your Ford shares could influence your decision," says Janice Johnson, a partner at
American Express Tax & Business Services
in New York. Remember, the difference between your original purchase price, a.k.a. your cost basis, and the fair market value of the share is the amount you'll owe tax on when you sell.
But don't forget to adjust your cost basis for the spinoff of
, its supplier of integrated automotive systems. If you were a Ford shareholder as of the market's close on June 8, you were eligible for around 0.131 shares of Visteon for every share of Ford you held.
Approximately 3.93% of the original basis in your Ford shares should be allocated to your new Visteon shares, including any fractional shares, says Hampton. The remaining 96.07% of your basis in Ford goes to your new Ford shares.
So be sure to consider your post-Visteon basis in Ford when determining your tax hit from the recapitalization choices. In some instances, taking the cash-and-stock option may create a larger capital gain at the time of the exchange than if you just took the all-stock option, notes Johnson. It's all timing, though.
Here's how the distribution will work. Denise Davidson, editor of
, a product of
, the supplier of tax-law information in Riverwoods, Ill., helped us out with an example.
The distribution price of Ford will be based on this week's weighted average trading price. So let's assume that the weighted average is $46, since that's where the stock is currently trading.
Let's also assume that your post-Visteon basis is $40.
In our example, with the weighted average at $46, if you took the all-stock deal, you'd get one share valued at $26 and a partial share worth $20."We anticipate that the market will adjust for the $20 distribution," says Hampton. So it's assumed that the stock will hover around $26 for a while.
But that exchange is nontaxable.
If you sold the next day, you'd recognize a $6 gain (total fair market value of $46 less your total basis of $40).
If instead you take the stock and $20 cash, with a weighted average price of $46, you'll get one share worth $26 and the $20 in cash.
With this option, you would have to recognize a $6 gain at the time of the exchange.
Stay with me here. Calculating the $6 gets funky.
You'll owe tax on the lesser of the gain recognized or the cash received. So what's the gain recognized?
It's the sum of the fair market value of the new stock and cash received less your basis in the old shares. In our example, the new stock and cash equal $46 and your old basis is $40. So you gain recognized is $6. (I swear I didn't make that up.)
Since you're paying tax on that $6 now, you don't want to pay tax on it again when you sell the shares, so you have to adjust your basis.
Your basis in your new shares is equal to your old basis, less the cash you received, plus the gain your already recognized. (Remember, when you increase your basis there is less of a spread to owe tax on.)
In our example: $40 less $20 plus $6 equals $26. Your basis in the new share is $26. If you sold it the day after the exchange, assuming the stock held at $26, you wouldn't owe a dime.
So, it's all timing. If you take the cash, you'll owe tax immediately. If you take all stock, you'll defer your tax bill until you sell the shares.
Ford Retirement Plan Deadline
For Ford employees holding shares in the company's retirement savings plans, the election deadline is midnight, Sunday, July 30 EDT, says Hampton.
Employees in these plans have the same elections, but have an additional option of choosing to have that partial cash distribution sent home. You will not incur the typical 10% penalty for early withdrawals from a retirement plan if you elect to take the cash outside of your account. But be aware: That distribution will be taxed at ordinary income tax rates, which could be as high as 39.6%.
The better option, obviously, is to leave the cash in the 401(k) account and defer the tax bill.
Check out Ford's
FAQ for more details.
Palm Distribution Scheduled for Today
The much-anticipated, much-hyped
distribution happens today. Any
shareholders as of 4 p.m. today will receive 1.484 shares of Palm for every share of 3Com they hold.
Don't go checking your brokerage account on Friday morning and expect the distributions to be there, though. It will take three to eight business days for the distribution to be transferred, according to 3Com's information statement.
Back on May 8, 3Com received a tax-free ruling from the
Internal Revenue Service
, so the Palm distribution will be tax-free to both the company and shareholders. But be aware that fractional shares will not be distributed. Instead, you'll receive the cash equivalent and that will be taxable at the capital-gains rates. Your holding period from 3Com will carry over to your Palm shares. Expect your check for those fractional shares in about two weeks.
The cost basis in your new Palm shares will be based on the market value of the shares on the date of the distribution. "So we have to wait until tomorrow to figure it out," notes Johnson.
Sit tight. We'll keep you posted.
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