CIGNA completed its merger with Express Scripts on 12/20/18 for cash and CIGNA stock.
The SEC proxy filing for this merger can be found through the CIGNA web site at:
The new information is related to the cash portion of the merger consideration. Part of this cash was contributed by ESRX. This means a portion of the merger is considered a redemption (sale) of ESRX shares. These revised instructions take this new information into account.
Resolution:
Before the merger can be entered a sell transaction of a portion of ESRX shares must be entered. After the sale is completed the remaining transaction is a merger treated as a cash-plus-stock reorganization. All the information below has been modified from the information available from the proxy filed with the SEC to account for the new information, except the price per share of CI on the merger date. The new information is from IRS form 8937, also now posted on the CI web site. Be aware that the SEC documents explicitly state that the final tax consequences are not knowable until after the merger is completed. These instructions are based on the assumption that Cigna shareholders will hold at least 50% of the combined company. On its web site Cigna states this requirement will be met. Be aware that new information may cause this transaction to be re-classified.
First, if you have made any entries for this transaction in the Club Accounting software, you should delete them. These instructions start with details for users of Club Accounting 3, the desktop version of the software. Myiclub users can use the Merger with Cash transaction. Instructions for Myiclub users are included after the instructions for Club Accounting 3 users.
First record the sale of a portion of ESRX shares. Then record the merger portion of the transaction.
To record this merger will require multiple entries in the accounting software. The basic outline of these entries is given below:
The capital gain realized is limited to the actual cash received so some clubs may need to adjust the capital gain amounts before entering the capital gain distributions. Instructions for doing this are included. The total merger consideration is $92.5179 per Express Scripts share. Your capital gain will be based on this total consideration with a limit that the total capital gain cannot exceed the total cash received, excluding cash-in-lieu of fractional shares.
Here is the information needed to enter the sell portion of this merger.
If you own multiple blocks, your broker will probably use the first-in-first-out method (FIFO) to determine the shares sold. This is the default for the accounting programs.
The total merger consideration is $92.5179 per Express Scripts share. This is $48.41298 in cash and $44.1049 of value in CIGNA shares (.2453 x 179.80 rounded to 4 decimal places). Calculate the total value received for your Express Scripts shares by multiplying 92.5179 by the total shares of Express Scripts owned. This must be done on a block by block basis.
Total Proceeds = [92.5179 x (# of Express Scripts 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 Express Scripts shares owned. From the total proceeds subtract the cost basis of that particular block. This will give you the gain for each block of Express Scripts shares using the total proceeds. Ignore any blocks with a loss. The cost basis can be found by starting a partial sale of Express Scripts. 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.
Next calculate the cash received for each block, for those blocks with a capital gain. The equation for this is [48.41298 x (# of Express Scripts shares still owned in each block after the sale transaction)]. For each block compare the cash received for that block with the capital gain calculated previously for that block. The smaller of the numbers is your gain from that block. Remember to ignore any blocks with a calculated loss using the total proceeds equation. Once you have the adjusted capital gain for each block with a gain, which is the smaller of a) the cash received or b) the total proceeds gain, add all the gains from 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 12/20/18.)
You should now have a figure for long-term and short-term capital gains recognized from this merger. If this amount is less than the total cash received, not including cash-in-lieu for fractional shares, then subtract the sum of your capital gains from the total cash received. This will be [48.41298 x (total # of Express Scripts shares still owned)] – (sum of capital gains). This amount will be entered as a return of capital.
Accounting for Cash Received
All of the following entries use the cash dividend screen, in CA3 this is Transactions > Cash Dividend or Distribution.
Next repeat the process for your short-term capital gain.
Finally, enter a return of capital entry, if needed.
Continue to step 3, The Merger.
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.
Save the transaction and this is finally done.
Note: The total number of CI shares received should be the same as before. Since the sale decreased the number of ESRX shares involved in the merger transaction the exchange ratio has been recalculated so the number of shares will match the shares received.
A worksheet is provided below to record the items that need to be calculated.
92.5179 x (# of Express Scripts shares in block) = ____________________________
[48.41298x (# of Express Scripts shares in block)] = ________________
Use this if (LTCG + STCG) is less than Total Cash received.
If you had entered the merger previously, delete that transaction before proceeding. Next enter the sell transaction followed by the Merger-with-cash.
The Sell Transaction
Here is the information needed to enter the sell portion of this merger.
If you own multiple blocks, your broker will probably use the first-in-first-out method (FIFO) to determine the shares sold. This is the default for the accounting programs.
Use the Merger with cash transaction.
Step 1
Step 2
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 the proxy statement requires a change. It may be necessary to change the entries for this merger at a later date.
In Merger with cash transactions, 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.
