LVTX

What are the tax implications for shareholders receiving cash versus contingent value rights in this deal?

Created August 06, 2025 at 07:49 PM

Tax treatment of the two components of the LVTX‑XOMA deal – cash per share and the non‑transferable Contingent Value Right (CVR) – is different for the shareholder who is on the “sell‑side.” Below is a step‑by‑step look at what the U.S. tax code (and the most common practice for similar transactions) says about each form of consideration.

1. Cash consideration – $1.16 + up‑to $0.08 per share

What the shareholder receives	Typical tax characterization	When the tax is triggered	How it is reported
Cash paid for the shares (the “sale price”)	Capital‑gain transaction – the shareholder is treated as having sold the LVTX shares for cash.	At the time the cash is actually received (the closing of the transaction).	- On Form 1040, Schedule D (Capital Gains and Losses). - The gain is the difference between cash received and the shareholder’s tax basis in the LVTX shares. - If the shares were held more than one year, the gain is a long‑term capital gain (0 %–20 % federal rate, plus any state tax). - If held one year or less, it is a short‑term capital gain taxed at ordinary income rates.

Why it is a capital gain, not ordinary income

The cash is consideration for the sale of a capital asset (the LVTX stock), not a dividend, interest, or royalty.
The IRS treats the exchange of one security for cash as a “sale” of that security (IRC §1001).
The shareholder’s adjusted basis (what they paid for the LVTX shares, plus any capital‑return adjustments) is subtracted from the cash amount to compute the gain or loss.

Practical points for the shareholder

Determine the original cost basis of the LVTX shares (including any prior wash‑sale adjustments, return of capital, or stock‑split adjustments).
Holding‑period matters: a long‑term gain gets the preferential 0 %/15 %/20 % rates; a short‑term gain is taxed at the marginal ordinary rate (up to ~37 % federally).
State tax: most states follow the federal capital‑gain classification, but rates differ.
Reporting: the cash is reported on the “Cash‑in‑Lieu of Stock” line of Schedule D; the transaction is also listed on Form 8949 (if required by the broker).

2. Contingent Value Right (CVR) – non‑transferable, “right to receive 75 % of net proceeds” from two partnered assets

What the shareholder receives	Typical tax characterization	When the tax is triggered	How it is reported
CVR that will pay a future contingent amount (based on the performance of LVTX’s partnered assets)	Property right – generally treated as a capital‑gain property when the CVR is exercised or the contingent payment is actually made. If the CVR is structured as a “royalty” or “interest” payment, the IRS may treat the amount as ordinary income. The exact classification depends on the CVR’s legal language and the nature of the underlying assets.	At the time the contingent payment is received (i.e., when the net‑proceeds from the partnered assets are distributed and the CVR is settled). If the CVR is deemed a “dividend” or “interest” it could be taxed when the right is granted, but most CVRs are tax‑neutral until the cash is actually paid.	- If treated as a capital‑gain property: – Report on Schedule D (Capital Gains) the difference between the cash received from the CVR and the shareholder’s basis in the CVR (the basis is usually $0 unless the CVR was purchased). – The gain is long‑term or short‑term depending on the period the CVR was held (the “holding period” starts when the CVR is granted). - If treated as ordinary income (e.g., royalty): – Report on Form 1040, line 21 (Other Income) or on Schedule 1, line 8. – Taxed at the shareholder’s marginal ordinary rate.
Key tax‑planning differences vs. cash	1. Timing of tax – cash is taxed immediately at closing; the CVR’s tax is deferred until the contingent payout occurs (which could be months or years later). 2. Rate of tax – cash gains are capital‑gain rates; CVR gains may be capital‑gain or ordinary‑income rates depending on the CVR’s structure. 3. Basis considerations – the CVR generally has a $0 basis, so the entire contingent payout is taxable (unless the CVR was purchased). 4. Potential for loss – if the CVR never pays out (e.g., the partnered assets under‑perform), the shareholder may have no tax liability on that portion, whereas cash is already taxed.

Why the CVR is usually taxed later (and often as a capital gain)

Nature of a CVR – It is a right to receive future cash that is contingent on a later event (the net‑proceeds from the partnered assets). The IRS treats such rights as “property” rather than “dividend” until the cash is actually paid.
Section 1274 (constructive receipt) does not apply because the shareholder does not have an unconditional right to the cash at the time of the transaction; the right is “contingent.”
Capital‑gain treatment is the default for “property rights” (e.g., warrants, options, and other contingent instruments) when the holder ultimately receives cash for the property.

When the CVR could be taxed as ordinary income

If the CVR is drafted as a “royalty” or “interest” on the net‑proceeds (i.e., the shareholder is effectively receiving a share of operating income rather than a capital‑sale proceeds), the IRS may view the payment as ordinary‑income under IRC §§ 61(a) and 861.
If the CVR is non‑transferable and the holder is required to treat the receipt as a “dividend” (e.g., the partnership assets are considered “distributable earnings”), the amount may be reported as dividend income (Form 1099‑DIV).

Because the press release does not spell out the exact legal language of the CVR, the safe assumption is that the CVR will be taxed as a capital‑gain property when the contingent cash is finally paid, but shareholders should review the CVR agreement (or the prospectus) to confirm whether any portion is designated as royalty/interest or dividend.

3. Bottom‑line comparison for the LVTX shareholder

Component	When tax is due	Tax rate likely applied	Potential tax‑planning advantage
Cash ($1.16 + up‑to $0.08)	Immediately at closing (the day the XOMA cash is received).	Capital‑gain rate (0 %/15 %/20 % if long‑term; ordinary rates if short‑term).	– No deferral; the tax is locked in now. – Ability to offset with capital‑loss carryforwards in the same year.
CVR (right to 75 % of net proceeds)	When the contingent payout is actually made (could be months/years after the sale).	Usually capital‑gain rate (long‑ or short‑term depending on holding period), unless the CVR is structured as royalty/interest → ordinary‑income rate.	– Defers tax until the cash is received, potentially allowing the shareholder to time the receipt to a lower‑income year. – If the payout never occurs, the shareholder may avoid tax on that portion entirely. – The shareholder can hold the CVR for >1 year to qualify for the long‑term capital‑gain rate on the eventual payout.

4. Practical steps for a LVTX shareholder

Calculate the cost basis of the LVTX shares you own (including any adjustments from prior returns of capital, stock splits, wash‑sale rules, etc.).
Determine the holding period of those shares to know whether the cash gain will be long‑ or short‑term.
Request the CVR agreement (or the “Deal Terms” document) from XOMA or the transfer agent to verify:
- Whether the CVR is defined as a “royalty/interest” (ordinary income) or as a “right to receive cash” (property).
- The exact date when the contingent payout will be calculated and paid.
Plan for cash‑flow timing:
- If you expect the CVR payout to occur in a year when your ordinary income is lower (e.g., retirement), you may benefit from the deferral.
- If you have capital‑loss carryforwards, you can use them to offset the cash‑sale capital gain now, while still waiting on the CVR.
Report the cash sale on Schedule D (Form 8949) and, when the CVR pays out, report the amount on the same schedule (or on “Other Income” if it is treated as ordinary).
Consult a tax professional – the exact classification of the CVR can change the tax outcome dramatically, and a CPA can help you interpret the legal language, file the correct forms, and possibly make an election (e.g., § 1202‑qualified small‑business stock, § 1244 loss election) if any of the LVTX shares qualify.

TL;DR

Cash per share = immediate capital‑gain tax on the difference between cash received and your LVTX share basis (long‑term if held >1 yr, short‑term otherwise).
Contingent Value Right = generally tax‑neutral until the contingent cash is actually paid; at that point it is usually taxed as a capital‑gain (rate depends on how long you held the CVR). If the CVR is drafted as a royalty/interest, the payout could be ordinary‑income.
The CVR therefore offers potential tax deferral and, if the contingent payout never materializes, may result in no tax on that portion, whereas the cash is taxed right away.

Because the precise tax treatment hinges on the exact legal language of the CVR, the shareholder should review the CVR documentation (or obtain a written clarification from XOMA) and, if needed, seek professional tax advice to ensure the correct reporting and to optimize any timing or offset strategies.