Question

In: Accounting

Cerner Corporation announced a first-come, first-serve stock repurchase offer to its shareholders – the company agreed...

Cerner Corporation announced a first-come, first-serve stock repurchase offer to its shareholders – the company agreed to repurchase 2,653,780 shares of its common stock in exchange for total consideration of $173,434,000. Cerner had 329,641,500 total shares outstanding before the redemption. You acquired 16,482,075 shares of Cerner's stock two years ago for $20/share. You were the only shareholder to participate in the repurchase offer and Cerner agreed to redeem the total number of shares directly from you.

Choose the response that accurately represents the amount and character of taxable income that you would report on your tax return with respect to the stock redemption assuming the redemption DID NOT qualify for exchange treatment.

If applicable, you may assume Cerner's current E&P balance is well in excess of its total dividend distributions for the year.

Multiple Choice

$173,434,000 short-term capital gain

$120,358,400 dividend income

$120,358,400 long-term capital gain

$173,434,000 long-term capital gain

$173,434,000 dividend income

Solutions

Expert Solution

The answer is the third option $120,358,400 long term capital gain.

The share repurchase or buy back is when a company buys back its own shares from the market. Since a company cannot be it's own shareholder, the shares purchased by it reduces the outstanding shares in the market.

From the shareholder's point of view shares bought back buy a company will be viewed as a normal sale for taxation purposes. Since this involves receiving cash in exchange for shares this is considered as a sale and not a dividend payment. As per question the shares were acquired 2 years ago for $20. Since its been held for more than a year, any gain/loss from the sale will be considered as a long-term capital gain/loss.

Calculation of long term capital gain/loss:

We have 16,482,075 shares purchased 2 years ago. The share buy back offer is for only 2,653,780 shares. Since no one else participated in the buy back the entire 2,653,780 shares were bought from us for a total consideration of $173,434,000. The shares were purchased at $20/share. Therefore total purchase consideration of 2,653780 shares was $53,075,600 (2,653,780 x 20).

Sale consideration for 2,653,780 shares                                                                  $173,434,000

Cost of 2,653,780 shares (purchase consideration)                                                 ($53,075,600)

Long term capital gain                                                                                               120,358,400

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