Note: In a taxable Merger transaction, realized capital gains and the cost basis of the new shares have a component dependent on the price per share used to calculate the value of the shares received. 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.
Encana completed its merger with Newfield Exploration on 2/13/2019 for Encana stock. The SEC filing for this merger can be found through the web site at:
https://investor.ovintiv.com/sec-filings?filer=CIK%3A0001157806&cat=4&year=2018 . Choose the S-4 dated 12/4/2018. The tax consequences to US shareholders of Newfield are described starting on page 126. Encana changed its name to Ovintiv later in 2019.
This merger is a taxable merger. As a taxable transaction this merger is treated as a sell of Newfield for the value of the Encana shares received followed by a buy transaction of Encana. The information below is based on the information available from a form S-4 filed with the SEC. Price information is from websites offering historical prices.
The total merger consideration is $16.41 per Newfield Exploration share. This is $16.41 in Encana shares (2.6719 x 6.14). The opening price of Encana on the day after the merger completion date was $6.14. Calculate the total value received for your Newfield Exploration shares by multiplying 16.41 by the total shares of Newfield Exploration owned.
Total Proceeds = [16.41 x (# of Newfield Exploration shares owned)] – (Reorganization fee).
For example, if you owned 100 NFX shares your total proceeds would be (1641.00 – Reorganization fee).
Use the Suspense account to receive the sale proceeds.
Date this transaction 2/13/2019.
Enter a buy transaction for the number of Encana shares you were entitled to receive in this merger. This will be 2.6719 x (# of Newfield shares owned). For example, if you owned 100 Newfield shares then enter 267.19 Encana shares purchased (2.6719 x 100).
Date the transaction 2/13/2019. The total purchase price will be the same amount as the proceeds from the Newfield sale transaction. The amount should be (16.41 x # of Newfield shares owned – reorganization fee). For example, if you owned 100 Newfield shares, then the total purchase cost would be 1641.00 – reorganization fee.
Choose the Suspense account as the source of funds for the purchase. Save the buy transaction.
Any fractional shares received in this merger will likely be sold by your broker.
Enter a Sell transaction for the fractional shares of Encana dated 2/14/2019. The share amount will be the NON-whole part of the shares bought in the buy transaction above. For example, if you owned 100 Newfield shares then you entered 267.19 Encana shares purchased. You would sell .19 Encana shares in this Sell transaction.
The total proceeds will be the cash-in-lieu amount listed on your broker statement.