Corporate restructuring sometimes involves exchanging shares of stock in one corporation for shares of stock in another corporation. For the most part, reorganizations are usually nontaxable events for the shareholders of both corporations involved. However, sometimes the exchange formula results in shareholders receiving a fractional share of stock.
Since most companies don’t want the administrative hassle of maintaining fractional shares, they will immediately sell the fractional share and send you a check. If you receive cash as well as stock, the cash portion might be taxable as capital gains. This cash is usually referred to as "cash paid in lieu of" on the Form 1099-B that you receive from your broker. The basis of the fractional share is the amount you paid for the original shares.
Example: You have 301 shares of stock in Company ABC. Now, Company XYZ buys Company ABC using its own stock in a 3-for-1 exchange. This means that you exchange the 301 shares of Company ABC for 100 shares of Company XYZ stock, and have 1 share of Company ABC stock remaining. This 1 share is equal to 1/3 of a share of Company XYZ stock. Instead of issuing a fractional share, Company XYZ sends you a check with the notation "cash paid in lieu of."
Although stock exchanges are usually tax-free, the amount paid out in cash is considered taxable income. To report cash paid in lieu of a fractional share in this situation, make these entries on the Capital Gains and Losses Worksheet:
Column (a) — Description of the fractional share (for example, "1/3 Company XYZ")
Column (b) — Acquisition date of the shares that you exchanged for a fractional share
Column (c) — Date of exchange
Column (d) — Amount of cash received
Column (e) — Basis of the fractional share
The basis of the fractional share is the basis in the share(s) you exchanged for the fractional share. Continuing the example, the basis of the fractional share is the basis you had in one share of Company ABC stock.
For more information, see Fractional Shares.