A certain company that I have stock in recently gave me 47 shares of anothe r stock. According to my brokerage account it was called a "non-taxable sp in-off". In Quicken (under investments), there is a heading called "Corpor ate Security Spin-off". The information requested within this heading call s for the original company name, new company name, new shares issued, cost per old share and cost per new share. All of the shares of stock I had in the original company are still there and I did not "buy" this new stock (al though a value was placed on it per share). It just suddenly appeared in m y brokerage account as a "non-taxable dividend". Should I enter this as a dividend or spin-off? If I notate it as a Corporate spin-off, what do I us e as the "cost per old share" since I don't know what the stock price was w hen I received the new stock shares?
This subject gets discussed here are least once a year, but my archives are not as extensive as they used to be a couple of Windows generations ago. Maybe John Pollard can dig up one of the several previous discussions.
A corporate spin-off is, as you suspect, a transfer of a subsidiary to its shareholders. (Often the new sub is newly created to receive assets to be spun off; in other cases an established subsidiary is spun off.) The parent company is then smaller by the value of the assets spun off. It still has the same number of shares outstanding, but each share is now worth less in the hands of the shareholder. But the shareholder also has some new shares representing ownership of the new, spun-off corporation. His total value is unchanged, but it is now represented by shares in two companies. His original basis in the parent corporation must now be allocated between the original shares - which he still has - and his new shares. The tax rules say the allocation must be made in the ratio of FMV (Fair Market Value) of the old and new shares. NOT on the value of individual shares, but on the values of the two bundles of shares he now holds in the old and new corporations.
FMV means the value of the shares immediately after the spin-off. Before the transaction, of course, there were no shares in the sub, so we must wait until shares in both the parent and the new company trade. Then we can multiply the FMV of the parent shares by the number of shares we still hold, and multiply the FMV of the new shares by the number of those we hold. Let's say we still have our 100 shares of the parent and they are worth only $3 per share or $300 total. We got 25 shares in the new company and they are trading at $8 for a total of $200. So all our shares are now worth $500. So if our original basis in the parent was $1,000, we now allocate
200 / 500 of it ($400) to our new shares and the other $600 to our 100 parent shares. Our parent shares now have a basis of $6 each ($600 / 100), and our new shares have a basis of $16 each ($400 / 25). To check our arithmetic: $6 * 100 = $600; $16 * 25 = $400; and $600 + $400 = $1,000, our original basis. The holding period (for long/short term gains) of the old shares hasn't changed and the new shares will have the same acquisition date as the old ones.
Quicken's "Corporate Securities Spin-Off" transaction handles this correctly IF we substitute "FMV" for "Cost" where it asks for "Cost" per Old and New Shares. Cost is what we are trying to determine; FMV is what we must enter to calculate that cost. In my little example we would enter .25 new shares per old share, $3 per share "cost" (actually FMV) per Old share and $4 per New share. (And, yes, I did unintentionally wind up with a big paper loss after the spin-off - but that's what we get for making up facts on the fly. )
So how do we know the FMV? We must wait for the first trades after the spin-off and then use procedures specified by the IRS to calculate it. In almost all cases, the parent corporation's accountants and tax lawyers will do that and publish their numbers soon after the transaction. We can just go to their website's Investor Relations page a few days later to find the numbers we need - often with a worked-out example.
Remember that I've been retired for more than 20 years, so check with your own CPA to be sure these rules haven't changed.
RC
-- -- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken Deluxe 2014 R 7 and Windows Live Mail in Win8.1 x64)
It would help if you'd specify the company in which you own the stock. Some spin-offs are pretty straight forward ... others (specifically Google) are quite complex. db
Your email furnished more details. As I explained in my Reply to that email, we should keep the discussion here in the newsgroup so that others can participate and - hopefully - help and benefit.
Your spinoff was Safeway's distribution of its Hawk Network subsidiary. I went to the Safeway.com website and found their Investors page where there is a LOT of information about the spinoff. I'm glad I did: This was a TAXABLE spinoff, unlike most that we've dealt with here. It's going to take me a while to digest all the discussion there, so I'm not going to attempt to post my thoughts just now. I'll try to post my interpretation of how you should handle the spinoff in Quicken - and on your tax return - in a few days.
You'll have to remember my caveats about my not being up to date on these things, and about my no longer having a license to practice public accounting. In the meantime, I hope others with proper qualifications will jump into this discussion. And I repeat my advice to consult with your own CPA.
RC
-- -- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken Deluxe 2014 R 7 and Windows Live Mail in Win8.1 x64)
A certain company that I have stock in recently gave me 47 shares of another stock. According to my brokerage account it was called a "non-taxable spin-off". In Quicken (under investments), there is a heading called "Corporate Security Spin-off". The information requested within this heading calls for the original company name, new company name, new shares issued, cost per old share and cost per new share. All of the shares of stock I had in the original company are still there and I did not "buy" this new stock (although a value was placed on it per share). It just suddenly appeared in my brokerage account as a "non-taxable dividend". Should I enter this as a dividend or spin-off? If I notate it as a Corporate spin-off, what do I use as the "cost per old share" since I don't know what the stock price was when I received the new stock shares?
I am still a bit confused about the FMV. The stock that I oringinally had was Safeway (SWY) and the spin-off was Blackhawk Network Holdings (HAWKB). I have 292 shares of SWY and the spin off gave me 47 shares of HAWKB. I checked Safeway's investor page and found that the spin-off gave me 0.164291/share of SWY equaling the 47 shares of HAWKB. Below is the info from Safeway's investor web page.
"In the Distribution, which will be done on a pro rata basis through a special stock dividend, holders of shares of common stock of Safeway, par value $0.01 per share, will receive 0.164291 of a share of Blackhawk Class B common stock for each outstanding share of Safeway common stock that they owned as of 5:00 p.m". (4/16/14) My brokerage account does list this as a "non-taxable spin-off liquidation Distribution"
Do I need to find out what the value of the SWY Shares were on the 16th to determine what their value? I am not a seasoned investor so much of this is new to me including what is meant by par value and pro rata basis. Any more info that you could provide would be welcomed.
Let's see: 292 SWY * 0.164291 = 47.972972 shares of HAWKB - almost 48 shares. You will briefly own that .972972 fractional share of HAWKB, but since they don't issue fractional shares, Safeway will sell that fraction for you and pay you cash for it. The price will be determined "immediately after" the spinoff, so it can't be known beforehand, but you should receive a statement for its sale. "Safeway stockholders will receive cash in lieu of any fraction of a share of Blackhawk Class B common stock that they otherwise would have received." If HAWKB stock is worth $100, you should receive $97.30 cash in addition to your 47 full shares; you should report that sale on Schedule D of your Form 1040; if you acquired your SWY shares on 1/1/12, you will report that as the acquisition date of your fractional share of HAWKB and your gain would be long-term, even though you held that fractional share only momentarily and sold it 4/16/14.
The basis of all your 47.972972 shares of HAWKB will be determined as I outlined before: on the ratio of all your SWY shares to all your HAWKB shares immediately after the spinoff (and before your immediate sale of your fractional share). And your HAWKB basis will then be reduced by the basis of the factional share you sold.
Let Quicken's spin-off transaction wizard make the calculation, allocating your basis on post-transaction FMV, and then record the sale of the fractional share. That should leave you with your 292 SWY - with a new smaller cost basis - and 47 HAWKB at its new basis. The total bases of the two issues will be slightly smaller than your original total basis in SWY.
Par value is a legal concept that is usually of no interest except to corporate lawyers; ignore it. Pro rata basis simply means "per share ratio".
As I said in email, spinoffs are almost always very carefully structured by corporate attorneys to qualify for tax-free status under IRC Sec. 355. So I was surprised to see the statement in Safeway's documents that "...we intend to treat the special stock dividend as a taxable distribution to our stockholders for U.S. federal income tax purpose..." But that statement is included in the document that describes the spinoff as only a part of Safeway's merger with Albertsons and it is not at all clear - to me - that the "taxable" comment refers to the HAWKB spinoff. I'll wait for clarification before commenting further on that.
As always, remember my long-retired status; laws and IRS rules change often, so check with your own CPA.
RC
-- -- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken Deluxe 2014 R 7 and Windows Live Mail in Win8.1 x64)
I am still a bit confused about the FMV. The stock that I oringinally had was Safeway (SWY) and the spin-off was Blackhawk Network Holdings (HAWKB). I have 292 shares of SWY and the spin off gave me 47 shares of HAWKB. I checked Safeway's investor page and found that the spin-off gave me 0.164291/share of SWY equaling the 47 shares of HAWKB. Below is the info from Safeway's investor web page.
"In the Distribution, which will be done on a pro rata basis through a special stock dividend, holders of shares of common stock of Safeway, par value $0.01 per share, will receive 0.164291 of a share of Blackhawk Class B common stock for each outstanding share of Safeway common stock that they owned as of 5:00 p.m". (4/16/14) My brokerage account does list this as a "non-taxable spin-off liquidation Distribution"
Do I need to find out what the value of the SWY Shares were on the 16th to determine what their value? I am not a seasoned investor so much of this is new to me including what is meant by par value and pro rata basis. Any more info that you could provide would be welcomed.
Thank you once again for your reply. In all honesty, I am a bit overwhelme d by all of this. I would *like* to get this transaction into Quicken but maybe I need some time for the dust to settle. It seems more involved than what I can manage at this point in time. PS...I am (obviously) very new t o this group (my first and only) and will improve my "netiquette". I am en joying reading the past posts.
I've had a bunch of these over the years. Let me see if I can explain what's happening in words of smaller syllables.
Point #1, and Fun With Capital Gains: Say you buy a stock on dates OldDate1, OldDate2, and OldDate3. Now, just for an example's sake, you sell said stock on Today.
So, for Capital Gains purposes (Schedule D) you'd tot up how much you spent on OldDate1, OldDate2, and OldDate3, and subtract that from how much you got Today: The difference is your capital gains and, since you got the check in this example, it's Real Money and the Feds want their share.
The total of the amounts you spent on OldDate1, OldDate2, and OldDate3 are defined as your Basis. So, What-you-got-Today - Basis = Capital Gains.
So, what if you didn't sell all of them Today? Well, that gets a bit interesting. You can work out your Basis for OldDate1 (let's call that Basis1), your Basis for OldDate2 (Basis2), and your Basis for OldDate3 (Basis3). Then you can decide to use one of three officially sanctioned methods: LIFO, FIFO, or Average, where LIFO = Last In, First Out, FIFO First In, First Out, and Average is where they tot up the total cash you've outlaid so far, divide by the total shares you have right now, and the result is defined as the average cost per share you have right now.
So, going along with the example, suppose you have 100 shares: 30 you bought on OldDate1, 30 you bought on OldDate2, and 40 you bought on OldDate3. If you sell 40 shares Today and you're using FIFO, you'd figure your Cost Basis for Today as the Basis1 from OldDate1 plus
10/30*Basis2; if you're using LIFO it'd be simply the value of Basis4; and if you're doing Average you'd do 40*(Average Cost Per Share Today).
In the end you'd subtract Cost Basis for Today from how much you got from the sale, and that'd be your Capital Gain (or Loss, if you got less than your Cost Basis for Today from the sale.)
Now, doing all the above is reasonable, slightly tedious, but doable. Nicely enough, Quicken can do all the calculations for you: You tell it whether you're doing LIFO, FIFO, Average, Minimize Cap Gain (in which case it picks the one that gives you the least gain) or Maximize Cap Gain (in which case it picks the one that gives you the most gain). You pocket the check, if any, and report the results on Schedule D for that year.
Oh, yeah: How long you've been holding a stock counts, too: If you (in the above example) sell in LIFO, and that last stock buy on OldDate3 is less than a year from Today, you'll be paying Short Term Capital Gains tax; otherwise, in the LIFO case, you might be paying only Long Term Capital Gains tax. Again, Quicken keeps track.
Point #2: What A Spin Off Does To You, and how Cost Basis can go Nuts. So, say you invested in some company, we'll call it AAA_Enterprises, and you got the 100 shares mentioned above. AAA decides for various reasons that life would be So Much Easier and Profitable for Stockholders if it split into two companies. Let's call the new company AAB, and, for argument's sake, say that it's designed to have 20% of the value of AAA.
So, on Today-1, the value of AAA = Total # of Shares of AAA in existence
Cost of a share of AAA. (Otherwise known as the market capitalization of AAA). On Today, with a new company in existence, Value_of_both_companies = (Total # of Shares of AAA * Cost of a share of AAA) + (Total # of Shares of AAB * Cost of a share of AAB). And the idea is that (Market Cap of AAA)/Value of Both = 80%, and (Market Cap of AAB)/Value of Both = 20%. Note that in this example, you still have the same number of shares of AAA as you had before the split, but you now have shares of AAB as well.
Fine. Wonderful. Company AAA goes on its merry way, making or losing money as it sees fit; Company AAB, likewise.
But, suppose on Today + 2, you decide that it's time to sell AAA. Um. The >original cost bases< of AAA included both the value of the >new< AAA and the >new< AAB. What, then, for your actual capital gains?
Luckily, the Accountants of the World, the Fed, the SEC, and the IRS have been out there ahead of you, so you don't have to tear your hair out and invent a new form of calculus. Ask Newton: It's not easy.
Remember that 20% number I cited above? What the above collection of luminaries (and Quicken) will have you do is to >reduce the cost basis of company AAA< for Each Time You Bought Some, by that 20%; it's called a Return of Capital transaction, and that (reducing cost basis) is what it does. And it's a dollar figure each time it occurs. Further, on each of those same dates, Quicken and the Luminaries will record a Buy transaction of company AAB (yes, you're buying it before the company is literally created) for that same 20% value, and the number of shares being the (number of shares of AAB being issued per share of AAA)*(# of Shares of AAA Being Bought On That Date).
As a result of this, not only will you have Basis1, Basis2, and Basis3 for AAA, you'll also have Basis1, Basis2, and Basis3 for AAB - on the same dates!
So, your total Basis for company AAA will be reduced by 20% - but, to make up for that, you'll have a Basis of the same value for company AAB.
What this means: Sell some AAA stock at time Future, and Quicken (and you) should have no problem figuring your new capital gains, since all those Return of Capital transactions subtracted from your Bases at the various dates gives you the way to calculate the correct Basis for your current transaction. Further, sell some AAB stock at time Future, and you'll note that your holding period (how long you've had the stock) is >not< based on the time the split occurred, but rather when you acquired your interest in AAB stock; that is, on dates OldDate1, OldDate2, and OldDate3.
If you look at the data Quicken wants for a corporate spin-off, it's all kind of obvious:
Security name of Old Company
Security name of New Company
# of shares of new Company issues per share of Old Company (a ratio)
Cost per old share of Old Comapany on the day of the spin-off.
Cost per new share of New Company on the day of the spin-off.
Whether it's taxable or not. (I haven't done taxable ones yet).
Now, they'll announce that all this is coming a month or so before the spin-off actually occurs. They'll tell you items #1 and #2 above; they'll likely tell you the ratio (#3 above); they might even tell you #5, if you're lucky, and they >will< tell you #6. What they're not going to tell you is #4 because, frankly, they won't know what it's going to be.
Anywhere from a week to a month or so after the split occurs, you'll get a final notice of the split (or discover it on the splitting companies' web pages), and you'll get accurate numbers, by their lights, on #'s 4 and 5. I would recommend not doing anything fancy in Quicken until that point, especially as #'s 4 and 5 may >not< be accurately recorded for tax purposes on the likes of Yahoo Finance or Bloomberg.
(Although that I'll admit that during a particularly complicated period of reconstructing a parent's financial history, I did just that on a decades-old transaction where I did know the split values, but the paperwork on values after the split were flat-out missing, and both the old company and new spin-off had been acquired by a succession of newer companies over time, and nobody would admit to knowing where the papers lived. Hence, the advantages of keeping good records. :) )
As previously pointed out, as a result of that ratio of new-stocks-for-old being flailed about, you're likely to end up with fractional shares of the new stock. Said fractional shares will be sold (capital gains!) and you'll be sent a check. But now you'll (or Quicken) actually be able to calculate the cost basis for that check, seeing as Quicken should have the numbers by then.
I've never done a taxable version of a spin-off, that not having come my way. Quicken says they still do the Return-of-Cap and Buy pair, but instead of doing the pair once per every buy of the Old Company, they do it once on the day of the spin-off.
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