Cause: Hewlett Packard Enterprises spun-off a software division as Seattle SpinCo. That spin-off company then merged with Micro Focus. Shares of Seattle SpinCo were never publicly traded. Cost basis information can be found at the HPE web site at https://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/seattle-6045b-statement-26092017.pdf The spinoff of Seattle SpinCo was a tax-free reorganization. HPE shareholders may recognize gain but may not recognize loss in the merger with Micro Focus.
This action will need multiple entries in the accounting software. The information below is based on the information available from HPE and SEC filings from Micro Focus. A spinoff should be entered first followed by a merger. Due to the requirement that gain but not loss can be realized, some outside calculations will need to be completed before the Merger portion can be entered. We suggest to read through all of the steps, before starting.
Go to Transactions > Spinoff or Accounting > Securities > Record spinoff of securities depending on the version of the software being used. If you are unfamiliar with spinoff transactions you can get help at this URL: https://www.iclub.com/support/kb/default.asp?page=normal_spinoff Here is the information you need to complete the first spinoff. Since Seattle SpinCo never traded, it has no ticker symbol. One was created for this transaction.
Here is the information you need to complete the merger with Micro Focus. The instructions are the same for Club Accounting 3 users and myiclub.com users. The number of Seattle SpinCo shares owned should be the same as HPE shares as the spinoff ratio was 1 to 1.
To record this merger will require multiple entries in the accounting software. The basic outline of these entries is given below:
The total merger consideration is $4.03 per Seattle SpinCo share, all in Micro Focus stock. Your capital gain will be based on this total consideration.
To help keep track of the numbers you will need for this transaction, we have a short workseet at the end of the instructions. It's not strictly required, but it can make the various calculations easier to keep track of.
The total merger consideration is $4.03 per Seattle SpinCo share (SEAT). This is zero in cash and $4.03 of value in Micro Focus shares (MFGP).
Calculate the total value received for your Seattle SpinCo shares by multiplying 4.03 by the total shares of Seattle SpinCo owned. This must be done on a block by block basis.
Total Proceeds = [4.03 x (# of Seattle SpinCo shares owned in each block)]. (Do this calculation for each block of shares.)
Write down the total proceeds amount on paper or spreadsheet for each block of Seattle SpinCo shares owned. From the total proceeds, subtract the cost basis of that particular block. This will give you the gain for each block of Seattle SpinCo shares using the total proceeds. *Ignore any blocks with a loss*.
The cost basis can be found by starting a partial sale of Seattle SpinCo (start a sale of one share for one dollar, for example). As part of the Sell process, a block selection screen will appear with the date purchased, number of shares and current cost basis for each block. Copy this information then cancel the sale.
Remember to ignore any blocks with a calculated loss, using the total proceeds equation. Sum the gains for each block with a gain. This will be your total capital gain for this merger. Remember to differentiate between short term and long-term gains. Check the purchase date of each block and compare it to the merger completion date of 9/1/17. You will need to check the purchase dates of Hewlett Packard Enterprises (HPE) as they correspond to the dates for Seattle SpinCo since it was a spinoff from HPE. Block dates for SEAT may all be displayed as the spinoff date. You should now have a figure for long-term and short-term capital gains recognized from this merger.
All of the following entries use the cash dividend screen or Cash Distribution screen
Go to Transactions > Merger. If you are unfamiliar with merger transactions you can get help at this URL: https://www.iclub.com/support/kb/default.asp?page=normal_merger
Here is the information you need to complete the merger.
If gains were realized, cash would be added to your account with the capital gains distributions. The total gains should be added back to the cost basis of the new MFGP shares and subtracted from your cash account. Use the same entry screen as you did in the Accounting For Gains section.
A worksheet is provided below to record the items that need to be calculated.
A. Total Proceeds received
4.03 x (# of Seattle SpinCo shares in block) = ____________________________
B. Total cash received. Not applicable.
C. Cost Basis of this block of Seattle SpinCo shares ____________ (from accounting records)
D. Total Proceeds LTCG = _____________________ (A-B) fill-in D or E as appropriate
E. Total Proceeds STCG = ____________________(A-B) fill-in D or E as appropriate
F. Actual LTCG ___________________ (D.)
G. Actual STCG ____________________( E.)
H. LTCG + STCG = __________________.
I. Return of Capital amount = – (LTCG + STCG) = ______________
J. Shares of Micro Focus Received = .13733 x (#Seattle SpinCo shares owned) = _________________. (For the merger transaction)
Important Reminders: The tax status of this merger is subject to change if the IRS challenges the company interpretation of the tax code as it relates to this merger or if the analysis of the conditions mentioned in form F-4 requires a change. It may be necessary to change the entries for this merger at a later date. In this Merger transaction, realized capital gains and the cost basis of the new shares have a component dependent on the price per share chosen in the entry screens. In our experience brokers tend to use the price per share published by the companies on their websites in their guidance to shareholders. If the companies publish guidance with a share price, we use that share price in our instructions to minimize possible differences between the accounting records and broker information. In cases where no guidance is available, we will choose the lower of the opening or closing price on the effective date. Either of these prices is acceptable to the IRS and by choosing the lower price some realized capital gains will be deferred to a later date. However, there is always the chance the price we choose will not be the price chosen by your broker. The gain from the merger and cost basis of the new shares recorded in your accounting records will then differ from your broker information. Because of the lack of detail in the tax code, both our choice and your broker’s choice would be reasonable estimates of market value for the shares received. Your records are NOT incorrect because they differ from your broker. Tax return forms do have specific areas to report these usually small differences. Our tax printer software handles these adjustment entries automatically in the normal operation of the software.
