How to treat the money received for accepting the cash offers to tender preferred shares for common stock?

I received cash for accepting an early offer (before maturity date) to exchange my preferred shares for common stock. How do I report this on my tax return? Instead of just reporting it as regular income, is there any way I can use this payment to reduce my cash basis in the common shares?

How to treat the money received for accepting the cash offers to tender preferred shares for common stock?
the tax guru has my vote.





My answer to ...How do I report this on my tax return?





is to simply wait for the IRS forms issued by the corporation who paid you the money. Could be a 1099 or a K1 perhaps.





Or go to them early and see if what you want it to be like ... can be accomplished.





good luck...
Reply:The exchange of preferred shares for common shares in the same company and cash is a recapitalization, also considered a reorganization (specifically a § 368(a)(1)(E) reorganization). The cash you received can be treated in one of three ways, depending upon the circumstances (not your choice!):





* As a dividend


* As a capital gain


* As a return of capital (nontaxable, reduced basis)





It is likely to be treated as a dividend if there were dividends in arrears on the preferred stock at the time of the exchange. There are other circumstances as well under which dividend treatment is required. Check the documentation that you received at the time the offer was made to see whether the company gave you a clue what treatment to expect.





The cash should be treated as a capital gain if it is not a dividend and if the total value you received (cash plus common stock) exceeded the basis in your preferred shares.





Finally, if neither of the preceding applies, the cash should be treated as a return of your investment. Not includible in income, and reduces your basis in the common shares.
Reply:i'd imagine it being part of your ordinary income, for common stocks, as long as you don't sell it, you report no gain... so even if the value of your portfolio increased by exchange, i don't think you pay any tax until it is sold





so, ordinary income, final answer