Former PennzEnergy Shareholders
Pennzoil Company was renamed PennzEnergy Company in January 1999. At that time, Pennzoil Company paid its shareholders a dividend consisting of common stock of Pennzoil-Quaker State Company (NYSE:PZL). The dividend was paid at the rate of one share of Pennzoil-Quaker State Company common stock for each share of Pennzoil Company common stock owned on the December 10, 1998 record date.
TAX BASIS IN PENNZENERGY SHARES
For United States federal income tax purposes, the dividend constituted a spin-off distribution which was received tax-free by the Pennzoil Company common shareholders. In such transaction, a portion of the adjusted tax basis for federal income tax purposes for the Pennzoil Company (renamed PennzEnergy Company) common stock was allocated to the Pennzoil-Quaker State Company common stock received in the distribution. This allocation was as follows: 51.002% of the tax basis in a share of Pennzoil Company common stock should be allocated to shares of PennzEnergy Company (formerly Pennzoil Company), while the balance of 48.998% should be allocated to shares of Pennzoil-Quaker State Company common stock.
TAX BASIS IN DEVON SHARES
The tax basis of your PennzEnergy stock surrendered is substituted for the tax basis in the Devon stock received in the transaction. You received .4475 share of Devon for each share of PennzEnergy stock surrendered. Therefore, your basis in each Devon common share is calculated by dividing your basis in each PennzEnergy share by .4475. For example, if your basis in each PennzEnergy share was $10, then your basis in each Devon share would be $22.35.
Fractional Shares
No fractional shares of Devon stock were issued. Therefore, holders of PennzEnergy shares received cash in lieu of such shares. A holder who received cash with respect to the fractional share is treated as having received such fractional Devon share pursuant to the merger and then as having sold such fractional share for cash. In these cases, you will need to calculate your tax basis on the fractional shares for which proceeds are received in order to determine the amount of gain or loss with respect to the fractional shares.
Example: Shareholder owns 50 shares of PennzEnergy with a tax cost basis of $10 per share. Upon conversion, the shareholder received 22 shares of Devon and proceeds from the sale of .375 share of Devon. Fractional share of Devon stock multiplied by tax basis per share of PennzEnergy = total tax basis (.375 share stock x $22.35 = $8.38).
Accordingly, the shareholder’s taxable gain or loss would be the amount by which the proceeds received for such fractional share exceed or are less than the $8.38 basis. You would have received a form 1099B for tax year 1999 that identified the fractional share amount.