Summary:

HPE shareholders received shares in a UK company -- Micro Focus -- in the September 2017 spinoff of HPE's software business. The software businesses sold included big data, security, and IT management products used by corporate customers: ArcSight, Atalla, Autonomy, Interwoven, Mercury Interactive, OpenView, Peregrine, and Vertica.

Due to unique circumstances, this transaction was potentially taxable for U.S. shareholders -- even if no Micro Focus stock had been sold. Some brokers and administrators apparently interpreted the transaction differently -- or did not report, or reported incorrectly -- to the IRS.

HPE's "Dear Shareholder" Cost Basis letter, which quotes an opinion provided by HPE's outside tax counsel, does not appear to have been actually mailed to shareholders.

How the spinoff worked:

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.

U.S. shareholders received "American Depositary Shares" in Micro Focus. An ADS is an equity share of a foreign company traded in dollars on an American stock exchange. (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 was this transaction potentially taxable?  Whether this was one of HPE's original intentions or not, by September 26, 2017 HPE's outside tax counsel had concluded that the transfer of HPE's software business to the UK-based Micro Focus would be penalized by the U.S. Government as a "corporate inversion" -- a process by which companies move their legal home overseas to reduce their U.S. tax bill. (Details: 4a1 Corporate Inversion - Why is this taxable?)

Note that your HP-related stock -- and therefore your Micro Focus stock -- may not all be in one place.

How the spinoff was communicated:

The original Sept 7, 2016 HPE press release announcing the deal says: "The transaction is expected to be tax-free to HPE." (By contrast, the HPInc/HPE split was originally announced as "tax-free to HP's shareholders" and the DXC spin/merge as "tax-free to HPE and CSC and their respective shareholders.")  [emphasis added.]

On  August 31, 2017, an opinion provided to HPE by Skadden, Arps -- the company's outside tax counsel -- stated: "As a result, you generally do not recognize gain or loss for U.S. federal income tax purposes on receipt of the Seattle Class A common stock in the Distribution, but U.S. shareholders will be required to recognize gain (but not loss) on the exchange of their Seattle Class A common stock for Micro Focus ADSs." 

The Sept 1, 2017 HPE press release announcing completion of the Micro Focus deal says "The spin-off of Seattle is intended to qualify as a generally tax-free transaction for U.S. federal income tax purposes."  [boldface emphasis added.]

The September 26, 2017 HPE Cost Basis letter, which quotes the outside tax counsel opinion, says "Dear Shareholder" -- but does not appear to have been actually mailed to shareholders by the Transfer Agent, Plan Administrators, or Brokers. (These roles are defined here: Where's my stock? )

As part of the advance written questions for the April 9, 2018 HPE "Virtual Online Annual Shareholder Meeting" three stockholders asked about the tax issue [page 5]:
- “Why am I being charged for taxes for sale of Seattle Spin Co.?? I never bought or owned it!!”
- “I am having a great deal of trouble convincing my tax advisor that the MFGP Spin-Off is tax free. Calls to HPE Investor Relations are not returned. As a former HP employee I would appreciate some help beyond the HPE Letter of 09/26/17 regarding the MFGP transaction.”
- “The recent Micro Focus spin off resulted in significant, immediate capital gains for the small trust I have held for my children since their father's death. Could this not have been handled more safely for small investors?”

HPE's written response addressed the tax issue only with: "For information regarding certain U.S. federal income tax consequences of the distribution of Seattle common stock and subsequent merger, please see the document entitled 'Important U.S. Federal Income Tax Information for Shareholders Concerning the Seattle Spinco, Inc. Common Stock Distribution' with a link to the HPE Cost Basis letter.

Administrators and brokers holding HPE stock varied in what they reported to the IRS:

Stock plan administrators and stock brokerages vary (sometimes dramatically) in how they make gain/loss and cost basis calculations and in what they report to the IRS. Each of the 236 NYSE member firms -- and others around the world -- is expected to read SEC filings, analyze Corporate Action Notices, and update the records they maintain on behalf of their clients.

- 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 cost basis 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 cost basis 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.

- Issues with specific administrators and brokers:  Fidelity issues reported by members   Merrill Lynch issues reported by members   Morgan Stanley issues reported by members  

Tax consequences:

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.

Action:

Given the complex series of HP, HPInc, 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 cost basis spreadsheets, updated April 5.  Be sure you are using current versions. Download in the next step.  

Be sure to save the documents you used -- plus, for future reference, a copy of the HPE "Dear Shareholder" letter (which was not actually sent to shareholders.)

Be sure to save the spreadsheets you have modified -- under a different filename -- and keep them for future reference when you sell shares, etc.

Background details:

Link to current location of Cost Basis letter on the HPE website:
http://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/seattle-6045b-statement-26092017.pdf  
The HPAA has a copy here:
https://www.hpalumni.org/seattle-6045b-statement-26092017.pdf

Link to current location of "Questions from Hewlett Packard Enterprise Company 2018 Annual Shareholder Meeting" on the HPE website:
https://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/2018-annual-stockholder-meeting.pdf 
The HPAA has a copy here:
https://www.hpalumni.org/2018-annual-stockholder-meeting.pdf

Official HPE presentation about the Micro Focus deal to HPE employees (undated pdf file) which covers:
- What happens to HPE shares you own (pages 8-9.)
- What happens to your Long-Term Incentives -- options and RSUs (pages 12-16.)
- U.S. taxable capital gain on MFGP share distribution (page 18-19.)

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.

For more mutual help on this topic and many others, join the independent HP Alumni Association. If you were formerly a regular, direct employee of HP, HPInc, or HPE -- or are in the process of leaving -- join the HP Alumni Association. No charge, thanks to HPAA members.

As financial, legal, and personal advice must be tailored to the specific circumstances of each case, and finances and laws are constantly changing, nothing provided here should be used as a substitute for the personalized advice of competent financial, legal, and personal advisors.

© 2021 Hewlett-Packard Alumni Association, Inc. • By using this site you accept these terms • Operated by former employees who volunteer their time. Not officially endorsed or supported by any company.