Tax Question: How does stock conversion work tax wise?

[The Gorn]

One stock I held for a few years was National City Bank (ticker: NCC). My 100 shares went from an initial investment of ~$3900 to the value of a few happy meals  and NCC was then acquired by PNC Bank.

So on 1/2/09, my block of NCC shares were converted to .92 share of PNC.

How is this handled tax wise? I put into Turbotax that I had a sale of those shares on that date, and a coinciding buy of the same type of stock. TT shows a capital loss of ~$3800. I am realizing a capital loss against our gross income of $3000 as a result.

Or can I do this? I didn't initiate the sale. In theory this was a continuous period of ownership. I know that a stock split, etc are capital gains neutral.

Can someone point me to the IRS document that covers this case?

Thanks.

[The Gorn]

Looks like it's in Pub 550: http://www.irs.gov/publications/p550/ch04.html#en_US_publink100010309

Under the heading "Corporate Stocks":

On April 18, 2009, KP1 Corporation was acquired by KP2 Corporation. You held 100 shares of KP1 stock with a basis of $3,500. As a result of the acquisition, you received 70 shares of KP2 stock in exchange for your KP1 stock. You do not recognize gain or loss on the transaction. Your basis in the 70 shares of the new stock is still $3,500.

This is pretty much what I have here. Damnit.

[Origisaurus]

That was my take.  You have to sell the asset in order to realize a loss.  As opposed to "mark to market" to produce a taxable gain.  The 535 thieves want it both ways.

[The Gorn]

It's not *completely* a trade.

I found a page on PNC's web site that was a tax advisory to people in my position.

It turns out that you only receive *whole* shares in the new company. The portion of the block of NCC (old) stock that I received in the form of cash, because it would result in less than one share of PNC (new), is  treated like a sale.

So, I get a little long term capital loss, IE, offsetting my gross income. Not the whole thing, though.

I received 3 shares of PNC in exchange. So I have up to (no more than) about 1/4 of my original investment that may be available as a capital loss, depending.

If I had sold the PNC in 2009 I could have written off almost the entire amount. This stings because it will reduce our refund from what I had hoped it would be.

Oh, well, at least I have a capital loss for the future. The 3 shares in PNC still will have a basis of over $2K, once I do the math.

Tax law sux. So complicated.

[pxsant]

Why not actually sell the stock so you can take the loss?

[The Gorn]

Why not actually sell the stock so you can take the loss?

I didn't even think about this in '09, so that year is done. This year, yes.

I worked through the calculations and of the $3900 original investment, I can claim a capital loss of about $880 (I received 3.92 shares. The .92 part is regarded as a sale.)