This page is supplemental information for our "Micro Focus Stock" page  -- it you haven't been to Micro Focus Stock already, please start there.

The software businesses sold included big-data, security, and IT management products from companies that HP had bought -- such as ArcSight, Atalla, Autonomy, Interwoven, Mercury Interactive, OpenView, Peregrine, and Vertica.

British IT news site "The Register" -- motto: "Biting the Hand that Feeds IT" -- headline at the time: "HPE dumps Grandpa Software in Micro Focus care home, hightails it."     https://www.theregister.com/2017/05/09/hpe_software/

How the spinoff was communicated:

The original Sep 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 spinoff and merger 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 US federal income tax purposes on receipt of the Seattle Class A common stock in the Distribution, but US 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 Sep 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 US federal income tax purposes."  [boldface emphasis added.]

The September 26, 2017 HPE/MFGP/"Seattle Spinco" 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 to those questions: "For information regarding certain US federal income tax consequences of the distribution of Seattle common stock and subsequent merger, please see the document entitled 'Important US Federal Income Tax Information for Shareholders Concerning the Seattle Spinco, Inc. Common Stock Distribution' with a link to the HPE/MFGP/"Seattle Spinco" letter.

Micro Focus paid the CEO's personal $5.9M "inversion" tax. 2018 Micro Focus Annual Report (page 97)

Details:

- As covered in the previous step ( Where's my stock? ) for shares held directly with a company's transfer agent -- in the Micro Focus case, Equiniti. Long-time HP employees may have old statements from HP's previous transfer agents: Harris Trust, Computershare (which bought the Harris stock registry business), BNY Mellon, then Computershare again. Employee purchase administration is now at Fidelity NetBenefits. 

- Spinoff shares will be in a new direct-registration account administered by the new company's transfer agent -- in the Micro Focus case, AST (American Stock Transfer) which is now part of Equiniti.

- 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.

- Reporting Admin and Broker Issues

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 Vanguard Brokerage apparently did not report the 2017 Micro Focus spinout to the IRS.

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 -- AST (American Stock Transfer) which is now part of Equiniti. 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.

Background details:

Details on corporate inversions: Corporate Inversion

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.)
- US 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.

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