MERGER: Teck Cominco Ltd (TCK) & Fording Canadian Coal (FDG)

Issue:

Teck Cominco Limited acquisition of Fording Canadian Coal Trust

Cause:

On November 7, 2008, each share of Fording Canadian Coal Trust [FDG] was converted to $82.00 cash and 0.245 shares of Teck Cominco Limited Class B Common [TCK]. No fractional shares of TCK were issued, but Canadian income tax at the rate of 15% was withheld on both the cash received and any cash received in lieu of fractional shares.

Resolution:

For U.S. shareholders of FDG, this is a taxable sale of their Fording shares. Total consideration for the sale will be the cash received at the rate of $82.00 per FDG share, plus the fair market value of the whole shares of TCK received, plus any cash received in lieu of fractional shares.

In calculating the above total consideration, it is important that any foreign tax withheld be added back to the net amount received so that the consideration consists of the gross amount received before any tax is withheld. Ordinarily, foreign tax withheld is reflected as a credit, to be allocated to each partner, and then applied against any federal tax payable by that partner. However, there is a limitation on the amount of credit for foreign tax that can be applied. In computing this limitation, one must calculate the percentage of foreign income to total income from all sources. This percentage is then applied to the total federal tax due. The credit can not exceed this calculated figure. Since the foreign tax was 15% of the total cash proceeds, and since the income from the transaction is the net gain, not the total cash proceeds, it seems likely that the limitation will apply and that most of the tax withheld can not be reclaimed by using the credit. Therefore, we suggest that the tax withheld be classified as a deduction, not a credit.

Let's take an example. Assume we owned 10 shares of FDG. Therefore, we received $820 in cash, on which $123.00 of foreign tax was withheld. We received 2.45 shares of TCK, which divides into 2 full shares (which we keep) and .45 shares (called fractional shares, and sold off automatically by the broker, and marked as "cash in lieu") which sold for $6.88, on which $3.51 was withheld for foreign taxes. TCK was valued at $11.71 for purposes of the merger.

Therefore, our two shares received had a value of $23.42 [2 x $11.71]. To that we add the $820.00 cash received, and the $6.88 gross cash in lieu of fractional shares, giving us a total consideration of $850.30. So we enter a sale of our 10 FDG shares, as of 11/7/08 for $850.30. Then, we enter a deductible expense of $126.51, which is the total of the taxes withheld [$123.00 + $3.51]. At this point, our cash should balance, and we are through.