"Cash in Lieu" payments are often received by investors and appear as "CIL" on the Form 1099-B report of sales proceeds at year end. These are payments received for fractional shares as a result of stock splits, corporate mergers, exchanges, and reorganizations. When the exchange ratio or split does not result in a whole number of new shares, the left-over fraction is paid in cash.
Many people simply report the payment as sales proceeds with zero cost and pay capital gains tax on the entire amount. The proper method, which also procures tax savings, is to allocate your adjusted cost basis to the fractional shares and pay capital gains tax only on the gain or loss.
You can use the calculators on this website to compute the cost basis of your fractional share based on the type of transaction that produced it. An "all stock" merger, a "stock & cash to boot" merger, a stock split, or a spinoff can all result in fractional shares.
Here is an example of the actual calculations:
You own 75 shares of Company XYZ, and a 50% stock dividend has just been declared. You are entitled to receive 37.5 shares, but the company will only issue whole shares. You therefore receive 37 shares, plus a cash in lieu payment of $10.00 for the 1/2 share. Your adjusted cost basis for the initial 75 shares was $1000.00.
After the stock split, you own 75 plus 37.5 shares, for a total of 112.5 shares. Your adjusted cost basis per share is $1000.00 divided by 112.5 shares, or $8.89 per share.
The cost basis allocable to the fractional .5 shares is $8.89 x .5 = $4.44. The net gain to be reported on your Schedule D for the cash in lieu payment is therefore $10.00 less $4.44 or a net gain of only $5.56.
Instead of being taxed on $10.00, with a little effort on your part to allocate your cost basis to the fractional share, you will be taxed on only $5.56 of gain.
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Information provided is intended solely for U.S. individual cash-basis taxpayers and is believed to be accurate for most cases. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please e-mail webmaster @ costbasis.com or write to us at P O Box 11022, Chicago IL 60611 with your comments.