Step 3. Micro Focus ("Seattle SpinCo") tax issue (Updated June 6, 2018.) Questions or comments to: email@example.com
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Micro Focus "Seattle SpinCo" US tax liability on 2017 return.
Micro Focus "Seattle SpinCo" US tax liability on 2017 return. Hewlett Packard Enterprise (HPE) shareholders received shares in a UK company, Micro Focus International, in the September 2017 spinoff of HPE's software business. An opinion provided by HPE's outside tax counsel states: "...U.S. shareholders will be required to recognize gain (but not loss)..." on their 2017 tax returns. Unlike previous spinoffs (Agilent, HPE, DXC), due to the unique circumstances involving a non-US corporation, HPE indicates that this transaction is taxable for US shareholders -- even if Micro Focus stock has not been sold.
If you owned HPQ stock on Oct 21, 2015, you automatically received stock in the new Hewlett Packard Enterprise company (HPE.) If you owned HPE stock on Sept 1, 2017, you automatically received "Seattle SpinCo" stock -- which was immediately merged into Micro Focus.
Note that your HP-related stock -- and therefore your Micro Focus stock -- may not all be in one place.
How the spinoff worked:
The HPE cost basis letter, which quotes the tax counsel opinion, says "Dear Shareholder" but was not mailed to shareholders.
The letter refers to American Depositary Shares. An ADS is an equity share of a foreign company traded in dollars on an American stock exchange. (If you want details: Investopedia Definition of ADS Micro Focus ADS page )
There were two steps to the spinoff. Each share of HPE spun off 1 share of a temporary company, "Seattle SpinCo." Then, each share of SpinCo became 0.137 share of Micro Focus, in the form of American Depositary Shares traded as "MFGP."
Why is this transaction taxable? Whether this was one of HPE's original intentions or not, HPE's outside tax counsel believes that the transfer of HPE's software business to the UK-based Micro Focus will be penalized by the US Government as a "corporate inversion" -- a process by which companies move their legal home overseas to reduce their US tax bill. (Details: Why is this taxable?)
Administrators and brokers holding HPE stock varied in what they reported to the IRS:
- As covered in the previous step ( 2. Where's my stock? ) for shares held directly with a company's Transfer Agent -- in the Micro Focus case, Equiniti (formerly the "Shareowner Services" division of Wells Fargo, which still has a separate local-office-based retail brokerage division called "Wells Fargo Advisors.") Long-time HP employees will have old statements from HP's previous transfer agents: Harris Trust, Computershare, and Mellon, then Computershare again because Computershare bought Mellon.
- Spinoff shares will be in a new direct-registration account administered by the new company's Transfer Agent -- in the Micro Focus case, American Stock Transfer.
- For shares held in a stock-purchase plan, option or equity award plan, or retirement plan, HPE indicates that spinoff shares should show up in your account at each Plan Administrator.
- For shares held at your broker, spinoff shares will show up in your brokerage account. -
- Some reported the HPE/SpinCo transaction to the IRS and sent you a 1099-B. However, they may not have used the correct cost basis for your HPE shares. Check their calculations with the assistance of the HPAA's unofficial stock spreadsheets.
- Some did not report the HPE/SpinCo transaction to the IRS. You can perform your own calculations -- even without detailed records -- with the assistance of the HPAA's unofficial stock spreadsheets.
- One member found that the HPE/SpinCo transaction was reported as interest on a 1099-INT and was able to convince their broker to correct it.
- In any case... Each of the 236 NYSE member firms (and others around the world) is expected to read SEC filings, analyze corporate actions, and update the records they maintain on behalf of their customers.
Any of the stock administrators or brokers involved with your HPE shares may have reported to the IRS -- and sent you 1099-B forms -- showing "proceeds" from the part they played in the two-step transaction.
A report will list only those stock Micro Focus lots with an apparent gain -- based on the broker's records. As explained in HPE's letter, if the cost basis in any of your lots is greater than the opening day Fair Market Value, you have a loss -- but that is not recognized for tax purposes and does not offset gains in other SpinCo lots. HPAA members indicate that some brokers -- including Vanguard -- recognize that they don't have accurate cost basis information for your HPE share lots and therefore did not report.
Table 1 in HPE's letter suggests a cost basis of $29.34 per MFGP share (the average of the first day's open and close prices), corresponding to $4.03 per Seattle SpinCo share ($29.34 x 0.137 MFGP share issued per SpinCo share). Members indicate that a report of the September 2017 transaction by your broker to the IRS will be in terms of the temporary Seattle SpinCo stock. Your broker may have used a different formula than the one suggested in HPE's letter -- resulting in a somewhat different value than $4.03. Check your brokerage account online -- or by examining a recent account statement -- to view your holdings in MFGP going forward.
In addition to the important transactions, members report receiving 1099-B forms for small amounts, 34-cent dividend checks, and other notifications of low-dollar-value stray transactions referring to either SpinCo or MFGP. These come from either the administrator of your existing employee shares or from the new company's transfer agent -- American Stock Transfer. If you get a trivial 1099-B, report it on your tax -- no matter how small. (Unlike 1099-INT's, there is no minimum reportable amount for a 1099-B.)
MFGP is not a foreign stock -- the ADSs keep it domestic.
Given the complex series of HP and HPE stock splits and spinoffs over the years -- and the number of administrators and brokers involved -- the cost basis for your HPE shares in your current broker's records may not be accurate, may not be tracked by purchase lot, or may be reported as "Unknown" -- i.e. defaulted to $0 and therefore incorrectly reporting that your MFGP shares were free. An incorrect cost basis could increase or reduce your possible tax liability on the new Micro Focus ADSs and for your future HPE and MFGP stock transactions.
If you do not have employee purchase records -- or did not input your lot-and-cost information into your broker's system -- for a particular time period before 3/1/2002, you can now estimate the average cost basis for SpinCo and Micro Focus stock over that period using HPAA's stock spreadsheets, updated April 5. Be sure you are using current versions. Download in the next step.
Be sure to save the documents you used -- including a copy of the HPE "Dear Shareholder" letter.
Be sure to save the spreadsheets you have modified -- under a different filename -- and keep them for future reference when you sell shares, etc.
Next step: 4. Stock Spreadsheets
Official HPE presentation about the Micro Focus deal to HPE employees (undated
pdf file) which covers:
Micro Focus tax background documents: "Tax Documentation Cover Letter" (The document has no letterhead or logo. To authenticate it, go to the Micro Focus ADR page and select the "Seattle SpinCo, Inc / Micro Focus Merger Tax Documentation Additional Information" link.) There is a link in that document to find Micro Focus Form 8937.
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