Cost basis for shares which spun off of Hewlett Packard (HPW->HPQ->A->VRGY)

I'm pulling my hair out in frustration. How do I figure out the COST BASIS of Verigy & Agilent stock?

Long ago I bought HWP (Hewlett Packard) and long ago sold it (as HPQ). Meanwhile, HWP dividended off A (Agilent) which in itself dividended off VRGY (Verigy).

In 2006 I finally sold both the A and VRGY shares, completing the sale.

My problem is that I have no idea what my COST BASIS is for the A and VRGY shares are (I sold the HPQ at a loss a few years ago).

Can you tell me HOW I am supposed to get my cost basis for tax purposes on the A and VRGY shares?

Sue

Reply to
Susan Grossman
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Complicating things is the fact that FRACTIONAL shares were already accounted for in previous tax years as they were received in money.

Is there a web site showing how to treat, say, 100 shares of HWP which spun off the A and VRGY stocks (including fractional shares)?

If I could figure out how to handle the first 100 shares, the rest would be easy.

Is there a web site showing how to treat a 100 share HWP->HPQ->A->VRGY split situation?

Sue

Reply to
Susan Grossman

I think the company's "investor relations" web pages can usually help. Here is one for HP / Agilent.

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I think you can find similar info for any Agilent spinoff at the Agilent web site.

Reply to
John Pollard

I'm going to assume you knew, and still know, what your original basis in HP was. That is, how much money you spent acquiring your HWP shares.

At the time you sold your HPQ, which was after the two spin-offs, you should have calculated a new (reduced) basis for your HPQ and used that basis for the calculation of the loss on sale you reported in your tax return. If you subtract the basis reported in that tax return from your original basis in HWP you've got the total basis in the two spun-off stocks. It really doesn't matter how you allocate this basis between the two stocks; the TOTAL gain or loss will be the same.

If you (or your tax preparer) never allocated the original basis in HPW to account for the spin-offs and it was the original basis in HPW that was used to calculate cost for the fractional shares and the subsequent sale of HPQ then your basis in A and VRGY is zero. You can report the sales of A and VRGY as pure profit, or, possibly, go back and amend the original return to reduce the loss in HPQ and then use the remainder of the basis to reduce the profits in A and VRGY.

Tom Young

Reply to
TomYoung

Hi, Susan.

Sometimes the only right answer is to start over. :>( And sometimes amended tax returns are required to straighten things out.

First, some dates would help: How "l> 22% of the original cost of your HWP shares may be allocated to the

And, see the PDF file reached by clicking on the U.S. Tax Information link in that paragraph, which takes you to

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You received .3814 shares of Agilent Technologies for each Hewlett-Packard > share owned by you So, if you deducted 100% of your original HWP basis when you sold HPQ, then you did it wrong and reported too small a gain (or too large a loss). You SHOULD file an amended return for the year of that sale. If that sale was before 2003, then it's probably too late for an amended return since the normal 3-year statute of limitations for the 2002 return expired on April

15, 2006. Still, even though it's too late to adjust your 2002 return, it is not too late to correct the basis of your A and VRGY shares. (In some cases, the statute of limitations is extended, such as if the return was filed late, or significant income was omitted, or fraud is suspected.)

The Verigy spinoff from Agilent was completed on October 31, 2006. See this page:

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Your sales of A and VRGY must have been after 10/31/06.

This is how I think you should compute your 2006 bases, assuming you bought

100 shares of HWP at $100 per share before June 2, 2000, for a total basis of $10,000:

6/2/2000: Allocate basis on Agilent spinoff:

78% of $10,000 to original HWP Shares: New basis of HWP: 100 shares at $78 = $7,800.00.

22% of $10,000 to Agilent: 2200 / 38.14 shares = $57.68 per share Basis of fractional share sold: $57.68 * .14 = $8.08 Basis of 38 whole shares: $57.68 * 38 = $2,191.84

Proof: $7,800.00 + $8.08 + $2,191.84 = $2,199.92 (rounded to $2,200.00)

10/31/2006: Allocate basis on Verigy spinoff (see this page, reached by clicking the "Tax Basis Information" link on the Verigy page above):
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38 Agilent shares * .122435 = 4.653 Verigy shares

94.22% of Agilent basis to Agilent shares: .9422 * $2,191.84 = $2,065.15 /

38 = $54.35 new basis per Agilent share 5.78% of Agilent basis to Verigy shares: .0578 * $2,191.84 = $126.69 / 4.653 = $27.23 new basis per Verigy share Basis of fractional share sold: $27.23 * .653 = $17.78 Basis of 4 whole shares: $27.23 * 4 = $108.92

Proof: $2,065.15 + $17.78 + $108.92 = $2,191.95 (rounded to $2,191.84)

So you should have reported the sale of the fractional share of Agilent in

2000. You should have used the new basis for HWP when you sold HPQ, between 2000 and 2006. And in 2006, you should report both the sale of the fractional share of Verigy, plus the final sales of your remaining shares of Agilent and Verigy.

If I've misunderstood any of what you said, please post back. Check with your own CPA to be sure to get it right, and to see if an amended return is possible - or advisable.

RC

Reply to
R. C. White

Hi RC,

Thank you for the help. I've stopped pulling my hair out and started looking up numbers and reading the pamphlets you & others suggested.

Agilent to Verigy spinoff calculations:

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Hewlett Packard to Agilent spinoff calculations:
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Hewlett Packard HWP to Hewlett Packard HPQ stock split calculations:
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So far, I read everything above and here's what I've calculated so far which may help other Hewlett Packard share holders.

TAX EVENT 1: In 1998, I paid $5,475.40 for 100 shares of Hewlett Packard (HWP).

TAX EVENT 2: On June 2, 2000 I received .3814 shares of Agilent (A) for each share of HWP, resulting in 38 shares of Agilent with the .14 share fraction being paid to me in cash. From your advice, I see I need to look up my 2000 taxes to see whether or not I paid taxes on those fractional share dollar amounts.

TAX EVENT 3: On September 27, 2000, 100 shares of HWP turned into 200 shares of HPQ, and HWP ceased to exist. Not only was this a 2:1 split, but the symbol changed from HPW to HPQ. I don't think this incurred any taxes though.

TAX EVENT 4: I sold the 200 shares of HPQ for $5,307.87 in 2001. I'm sure I paid taxes based on the cost basis suggested by the material sent me at that time but I don't remember what I used for that cost basis. So, I guess I need to look up my 2001 taxes also.

TAX EVENT 5: On November 1, 2006, each share of Agilent spun off 0.122435 shares of Verigy (VRGY) resulting in 4 shares of Verigy (VRGY) for my 38 shares of Agilent with the fraction being paid to me in cash. I don't know if I should pay taxes on the fractional amount.

TAX EVENT 6: I finally decided to put an end to my tax calculation misery on this stock, so, in December of 2006, I sold the 38 shares of Agilent for a total of $1,222.39.

TAX EVENT 7: At the same time, since the Verigy calculations caused more misery than the stock was worth, I also sold the 4 shares of Verigy for a total of $56.48.

Now all I'm left with is the tax calculation problem. I see from your comments that it's critical that I find my 2000 taxes and figure out what I used for the cost basis of the HPQ stock sale. I also have to figure out how I handled the fractional shares.

What are we supposed to do with the fractional shares anyway?

Sue

Reply to
Susan Grossman

Whoever said taxes only take ten hours didn't have any stock sales! :(

Digging through my garage, I finally found my 2001 taxes to find the cost basis I used for my 200 shares of HPQ sold in 2001.

  1. I bought 100 shares of HWP for ,475.40 in 1998.
  2. I received .3814 shares of A for each share of HWP on June 2, 2000.
  3. Agilent was .75 on 6/2/2000 so .14 shares x .75 = .45 cash.
  4. HWP split 2:1 on October 27, 2000 giving me 200 shares in total.
  5. Inexplicably, the HWP name was changed to HPQ at the same time.
  6. I sold the 200 shares of HPQ for ,307.87 in 2001.

The cost basis I used for HPQ on my 2001 taxes was: Cost basis of HPQ = (Cost of HWP - Value of .14 share of A) * 78% Cost basis of HPQ = ($5,442.45 - $11.45) * 78% Cost basis of HPQ = $5,431.oo * 78% Cost basis of HPQ = $4,236.18

The numbers show the long term gain I paid taxes on HPQ was: Gain = Sale basis for HPQ - Cost basis for HPQ Gain = $5,307.87 - $4,236.18 Gain = $1,071.69

That left a cost basis for Agilent in 2001 of: Cost basis of A = (Cost of HWP - Value of .14 share of A) * 22% Cost basis of A = ($5,442.45 - $11.45) * 22% Cost basis of A = $5,431.oo * 22% Cost basis of A = $1,194.82

Now, I guess I need to figure out the new cost basis for Agilent and for Verigy. I wish Uncle Sam didn't make this so difficult to figure out.

Sue

Reply to
Susan Grossman

Following your example exactly, I just now calculated what I think you suggested I should. Is this tax calculation below correct?

  1. I bought 100 shares of HWP for ,475.40 in 1998.
  2. I received .3814 shares of A for each share of HWP on June 2, 2000.
  3. Agilent was .75 on 6/2/2000 so .14 shares x .75 = .45 cash.
  4. I paid long-term capital-gains taxes on that .45 in tax year 2000.
  5. HWP split 2:1 on October 27, 2000 giving me 200 shares of HPQ.
  6. I sold the 200 shares of HPQ for ,307.87 in 2001. The cost basis I used for HPQ on my 2001 taxes was: Cost basis of HPQ = (Cost of HWP - Value of .14 share of A) * 78% Cost basis of HPQ = (,442.45 - .45) * 78% Cost basis of HPQ = ,431.oo * 78% Cost basis of HPQ = ,236.18
  7. My 2001 show the long term gain I paid taxes on HPQ was: Long-term Gain = Sale basis for HPQ - Cost basis for HPQ Long-term Gain = ,307.87 - ,236.18 Long-term Gain = ,071.69
  8. That left a cost basis for Agilent in 2001 of: Cost basis of A = (Cost of HWP - Value of 0.14 share of A) * 22% Cost basis of A = (,442.45 - .45) * 22% Cost basis of A = ,431.oo * 22% Cost basis of A = ,194.82
  9. On October 31, 2006, each A share spun off 0.122435 shares of Verigy.
  10. That changes the cost basis for the Agilent shares to: New cost basis of A = 94.22% of the old cost basis of A New cost basis of A = 94.22% * ,194.82 New cost basis of A = ,125.76
  11. That leaves us with the cost basis for the new Verigy shares as: Cost basis of VRGY = 5.78% of the old cost basis of A Cost basis of VRGY = 5.78% * ,194.82 Cost basis of VRGY = .06
  12. I guess I also have to pay taxes in 2006 for the fractional shares: Basis of fractional share of VRGY sold = .06 / 4.653 * 0.653 Basis of fractional share of VRGY sold = .84 * 0.653 Basis of fractional share of VRGY sold = .69 So, I guess I pay a long-term capital gain on .69 (do I)?
  13. Following your lead, I guess the share basis for VRGY is: Share basis for VRGY = .84 * 4 shares = .37
  14. Following your example, I guess the proof is: New A basis + fractional basis + VRGY basis = old A cost basis ,125.76 + .69 + .37 = ,194.82

With your assistance, am I finally correct on the total tax ramifications of owning the original 100 shares of HWP stock?

Reply to
Susan Grossman

Hi, Susan.

Well done! With a few minor exceptions. Step by step...

Good. Not a taxable or reportable event, but everything from here on down is based on this transaction.

The receipt of the shares is not taxable or reportable, but the near-simultaneous event 4 is. And this is the point at which your basis in HWP must be split between HWP and A. From my earlier post, adjusted to your actual basis in HWP (and ignoring rounding differences):

6/2/2000: Allocate basis on Agilent spinoff: 78% of $5,475.40 to original HWP Shares: New basis of HWP: 100 shares at .78 * $5,475.40 = $4,270.81 = $42.71 per share. 22% of $5,475.40 to Agilent: .22 * $5,475.40 = $1,204.59 / 38.14 shares $31.58 per share Basis of fractional share sold: $31.58 * .14 = $4.42 Basis of 38 whole shares: $57.68 * 38 = $1,200.04

Proof: $4,270.81 + $4.42 + $1,200.04 = $5,475.27 (rounded to $5,475.40)

Good. But this is not your BASIS in A;, it is the selling price of that .14 share.

Not quite right. You owed tax on your GAIN, which was $11.45 minus your basis in that .14 share of A.

$11.45 - $4.42 = $7.03, your taxable Long-term Capital Gain on 6/2/2000. (Long-term, even though you had held the .14 share only momentarily, because of the holding period rules for a non-taxable spin-off. The holding period of the underlying HWP shares is "tacked onto" your holding period for A.)

Not a taxable or reportable event. Just adjust your basis in your HPQ shares:

$4,270.81 / 200 = $21.35 per share of HPQ

Wrong - but not by much. As shown at 5, the HPQ basis should have been reduced by the BASIS allocated to A, not its selling price.

Taxable long-term capital gain reportable in 2001: $5,307.87 - $4,270.81 = $1,037.06

So you should have paid tax on $34.63 more LTCG for 2001.

Assuming no unusual circumstances, the time for filing an amended return for

2001 expired on April 15, 2005, so it is too late for you to correct this small error. Forget trying to correct this gain, but use the correct basis calculations for Agilent in the future.

Not quite. As shown in 2, above, your basis in 38 shares of A should be $1,200.04.

Not taxable or reportable, but this triggers the new basis calculations.

Make that 94.22% of $1,200.04 = $1,130.68

Make that 5.78% of $1,200.04 = $69.36

You don't pay tax on the fractional share. You pay tax on the GAIN from selling the fractional share.

$69.36 / 4.653 = $14.91 Basis per share of VRGY $14.91 * .653 = $9.74 Basis of fractional share sold

Your selling price was $16.80 per share, or $10.97 for your .653 fractional share; this should equal the check you received. So you owe tax on $1.23 ($10.97 - $9.74) long-term capital gain.

Not quite. See 12, above. Basis of 4 shares of VRGY $69.36 - $9.74 = $59.62 ($14.91 per share)

Make that: $1,130.68 + $9.74 + $59.62 = $1,200.04

And $1,200.04 + $4.42 + $4,270.81 = $5,475.27 + 13 cents lost to rounding along the way = $5,475.40, your original cost of your 100 HWP shares in

1998.

The differences are small and not worth correcting, in my opinion. They are based on two misunderstandings:

  1. Only the GAIN from sales of fractional shares is taxable, not the entire proceeds from the sale.
  2. Basis of the old shares is allocated between old and new shares based on the RATIO of their Fair Market Values, not on the actual FMV of the spun-off shares.

Forget about correcting the minor errors in prior years. For 2006, report:

10/31/06: Sale of .653 shares of VRGY: $10.97 - $9.74 = $1.23 LTCG 12/?/06: Sale of 4 shares of VRGY: $56.48 - $59.62 = $3.14 LTCL 12/?/06 - Sale of 38 shares of A: $1,222.39 - $1,130.68 = $91.71 LTCG

For a new Long-Term Capital Gain of $89.80. (Your result may be pennies different because of rounding.)

So your total gain from your 1998 investment (not counting cash dividends) was: (I hope Windows Mail doesn't mess up the formatting too badly.)

Cash Received:

6/2/2000 - Cash for fractional share of A $ 11.45 2001 - Sale of 200 HPQ 5,307.87 10/31/06 - Cash for fractional share of VRGY 10.97 12/?/06 - Sale of 4 VRGY 56.48 12/?/06 - Sale of 38 A 1,222.39

Total Cash Received $6,609.16

Less original cost 5,475.40

Net Gain $1,133.76

Reported as:

2000 Gain on fractional share of A $ 7.03 2001 Gain on sale of HPQ 1,037.06 2006 Gains 89.80 Total $1,133.89

That's better than some of my investments. ;

Reply to
R. C. White

Hi there R. C. White.

You are my hero! You embody the best on the usenet - people helping people.

Thanks to you, I belatedly see the many errors in my tax thinking. As for my part, so that others in a similar tax quandary may benefit, I repeat the essential tax calculations below (fixing all errors) so someone else can easily follow our methodology, even if they were to own a different stock.

To that end, I've reordered the items below to group similar mandatory tasks. Note that four significant figures are often employed (sometimes six when necessary to avoid mismatches) to minimize rounding confusion when dropping back to two decimal places.

Hopefully this helps others avoid pulling their hair out for taxes!

A. In 1998, you pay $5,475.40 for 100 shares of Hewlett Packard (HWP). All calculations below are unavoidable tax consequences of that act.

B. On June 2, 2000, shareholders received 0.3814 shares of Agilent (A) for every share of HWP, resulting in: 100 shares HWP x 0.3814 = 38.1400 shares of Agilent.

You must obtain the HWP to A spinoff calculations from HWP:

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You must perform the following seven (7) calculations.

  1. You must recalculate the HWP cost basis: The new HWP cost basis was 78% of the original HWP cost basis. New cost basis for HWP = 78% of the original cost basis for HWP New cost basis for HWP = 78/100 x ,475.40 New cost basis for HWP = 0.78 x ,475.40 New cost basis for HWP = ,270.8120

  1. You must calculate the aggregate Agilent cost basis: The aggregatge Acost basis was 22% of the original HWP cost basis. Aggregate Agilent cost basis = 22/100 x ,475.40 Aggregate Agilent cost basis = 0.22 x ,475.40 Aggregate Agilent cost basis = ,204.5880

Proof is the new cost basis should always equal the old cost basis: Old cost basis HWP = New HWP cost basis + aggregate A cost basis Old cost basis HWP = $4,270.8120 + $1,204.5880 Old cost basis HWP = $5,475.40 (check)

  1. You must calculate the aggregate Agilent cost basis per share: Aggregate A cost basis per share = A cost basis/number of shares Aggregate A cost basis per share = ,204.588/38.14 shares Aggregate A cost basis per share = .5833/share

  1. You must calculate the Agilent fractional share cost basis: Agilent fractional share cost basis = 0.14 share x .5833/share Agilent fractional share cost basis = .4217

  2. You must calculate the Agilent fractional share sale basis: Agilent was trading at .75 on June 2, 2000 when the Agilent fractional share was sold beyond your control. Agilent fractional share sale basis = .75/share x 0.14 shares Agilent fractional share sale basis = .4450

  1. You must calculate the Agilent fractional long term capital gain: Fractional share LTCG = fractional sale basis - fractional cost basis Fractional share LTCG = .4450 - .4217 Fractional share LTCG = .0233

LTCG taxes must be paid on the $7.03 in tax year 2000.

  1. You must calculate the Agilent whole share cost basis: Whole share A cost basis = Aggregate cost basis - fractional cost basis Whole share A cost basis = ,204.5880 - .4217 Whole share A cost basis = ,200.1663

Proof is 38 shares x $31.5833/share = $1,200.1654 (check) C. HWP split 2:1 on October 27, 2000 resulting in 200 shares of HPQ. Note the symbol changed from HWP to HPQ at this point in time.

You must obtain the HWP to HPQ split & symbol change calculations:

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D. Selling 200 shares of HPQ in 2001 for $5,307.87 triggered an event: LTCG for HPQ = sale basis of HPQ - cost basis of HPQ LTCG for HPQ = $5,307.87 - $4,270.81 LTCG for HPQ = $1,037.06

LTCG taxes must be paid on the $1,037.06 in tax year 2001.

E. On October 31, 2006, shareholders received 0.122435 shares of Verigy (VRGY) for every share of Agilent, resulting in: 38 shares A x 0.122435 = 4.6530 shares of VRGY You must obtain the Agilent to Verigy spinoff calculations:

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You must perform the following seven (7) calculations.

  1. You must recalculate a new Agilent cost basis: The new A cost basis was 94.22% of the previous A cost basis. New cost basis for Agilent = 94.22/100 x ,200.1663 New cost basis for Agilent = 0.9422 x ,200.1663 New cost basis for Agilent = ,130.7967

  1. You must calculate the aggregate Verigy cost basis: The aggregate VRGY cost basis was 5.78% of the previous A cost basis. Aggregate Verigy cost basis = 5.78/100 x ,200.1663 Aggregate Verigy cost basis = 0.0578 x ,200.1663 Aggregate Verigy cost basis = .3696

Proof is the new cost basis should always equal the old cost basis: Old Agilent cost basis = New A cost basis + aggregate V cost basis Old Agilent cost basis = $1,130.7967 + $69.3696 Old Agilent cost basis = $1,200.1663 (check)

  1. You must calculate the aggregate Verigy cost basis per share: Aggregate VRGY cost basis per share = VRGY cost basis/number of shares Aggregate VRGY cost basis per share = .3696/4.6530 shares Aggregate VRGY cost basis per share = .9086/share

  1. You must calculate the Verigy fractional share cost basis: Verigy fractional share cost basis = 0.6530 share x .9086/share Verigy fractional share cost basis = .7353

  2. You must calculate the Verigy fractional share sale basis: Verigy was trading at .80/share on October 31, 2006 when the Verigy fractional share was sold beyond your control. Verigy fractional share sale basis = .80/share x 0.6530 shares Verigy fractional share sale basis = .9704

  1. You must calculate the Verigy fractional long term capital gain: Fractional share LTCG = fractional sale basis - fractional cost basis Fractional share LTCG = .9704 - .7353 Fractional share LTCG = .2351

LTCG taxes must be paid on the $1.2351 in tax year 2006

  1. You must calculate the Verigy whole share cost basis: Whole share VRGY basis = Aggregate basis - fractional basis Whole share VRGY cost basis = .3696 - .7353 Whole share VRGY cost basis = .6343

Proof is 4 shares x $14.9086/share = $59.6344 (check)

F. To exit from this tax calculation misery, you sell all 38 shares of Agilent in December of 2006 for $1,222.39

You must calculate the long term capital gain on Agilent: LTCG for Agilent = sale basis of A - cost basis of A LTCG for Agilent = $1,222.39 - $1,130.7967 LTCG for Agilent = $91.5933

LTCG taxes must be paid on the $91.59 in tax year 2006.

G. To end the pain once and for all, you sell the 4 piddly shares of Verigy in December 2006 for a total of $56.48.

You must calculate the long term capital loss on Verigy: LTCL for Verigy = sale basis of VRGY - cost basis of VRGY LTCL for Verigy = $56.48 - 59.6343 LTCL for Verigy = (-3.1543)

Long-term capital losses of -$3.15 exist in tax year 2006. =================================================Cash Received:

06/02/2000 = $11.45 (Cash for fractional share of A) 07/01/2001 = 5,307.87 (Sale of 200 HPQ) 10/31/2006 = 10.97 (Cash for fractional share of VRGY) 12/04/2006 = 56.48 (Sale of 4 VRGY) 12/07/2006 = 1,222.39 (Sale of 38 A)

---------------------- TOTAL RECD = 6,609.16 LESS COST = 5,475.40 NET GAIN $ 1,133.76

Reported as: TAX YEAR 2000 = 7.03 (Gain on fractional share of A) TAX YEAR 2001 = 1,037.06 (Gain on sale of HPQ) TAX YEAR 2006 = 91.59 (Gain on sale of Agilent) TAX YEAR 2006 = 3.15 (Loss on sale of Verigy)

---------------------- Total $ 1,132.53 (Gain over 8 years)

Gain = Principal * Rate * Time Rate = Gain/Principal/Time Rate = $1,132.53/$5,475.40/8 years Rate = 0.0259 (before taxes) Rate = 0.0259 x 80% (after taxes)

ANALYSIS: Hewlett Packard was NOT a very good investment! Gain ~ 3% before taxes The gain wasn't even worth the tax calculation. :( Gain ~ 2% after taxes =================================================

Reply to
Susan Grossman

Except that Quicken will do most of the calculations for you and then you do not have to be concerned with rounding errors. Q will calc the per share costs, you should use total dollars.

A. You calc for the Aligent spin off: 1. Cost of new shares= 22% x $5,475.40 = $1,204.59 2. Number of new shares= 100 x 0.3814 = 38.1400

B. Make three Quicken entries: 1. Return of Cap: HPW of $1,204.59 (remaining cost of HPW calc by Q) 2. Buy: Aligent 38.14 shares for $1,204.59 (cost per share calc by Q) 3. Sell: Aligent 00.14 shares for $11.45 (what you actually received) (Q shows CG as ST but the term is to purchase date of HWP)

Repeat as necessary for other spin offs.

Your problem is to check what you did report to IRS and then, since you cannot go back and change your return after three years, to NOT use the above method but to make sure that your actual cost and gain/loss are reflected when the stocks are sold. I do not think IRS cares how you split your costs between HWP and Agilent as long as at the end all costs and gain/loss are accounted for.

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Reply to
Eric Bloch

Hi, Susan.

Congratulations! I haven't tried to key all those calculations into my machine to verify them, but it looks good to me.

This would not have seemed so daunting if the spin-offs had been recorded properly as they occurred. It's just having to do them all at once that makes for a long exercise.

RC

Reply to
R. C. White

Hi, Eric.

The Agilent spin-off should have been recorded by using the Easy Action, or whatever it was called in Quicken 2000. (I used that version, among most of the others, but I've forgotten just when some features changed.) But the program, then and still now, used some terminology that was - and still is - wrong and confusing.

In Q2007, the Enter Transactions pull-down is Corporate Securities Spin-Off. It produces the right answer when we give it the right inputs. But it asks for the WRONG input! Instead of "Cost per old share (post spin-off)", and "Cost per new share", it should ask for the Fair Market Values of the old and new shares. "Cost" is the OUTput that we are seeking, not the input. (Actually, of course, the word should be "Basis", as in "Basis for determining gain or loss". "Basis" is the same as "cost" in MOST situations, but not all, such as for inherited or gifted property.)

HP's worksheet did some of the work for taxpayers by telling them that the original HWP basis should be allocated 78% to HWP and 22% to the new A shares. In Quicken, taxpayers should have entered $110.833 ($142.06 - (.3814 * $81.875 = $31.227)) as the "cost" - actually the FMV - of HWP and $81.875 for A, since those were the values reported by HWP. (FMV is really a matter of opinion, and there are many ways of arriving at such opinion. HP's opinion is not the only one possible, but it's the easiest to use, since it is already furnished to shareholders in the PDF file. And HP did not actually calculate the $110.833, but just told how they calculated it.) This does not mean that $110.833 : $81.875 produces a 78 : 22 relationship. Since only .3814 share of A was received for each HWP share, the relationship would be $110.833 : $31.227 (.3814 * $81.875); this is (rounded to) 78 : 22. There are rounding differences, but they are small.

Quicken will make Return of Capital entries for the spun-off shares. As we discussed in a lengthy thread hear a year or two ago, this is not strictly correct because there is no ROC involved, only a separation of a single investment into two securities. But that treatment by Quicken produces the correct result for the parent corporation, so we can accept it.

But it is NOT correct to record the receipt of the A shares as a Buy. First, this will record the spin-off date as the acquisition date for the A shares. Quicken's spin-off transaction will correctly show the acquisition date as 1998, when the HWP shares were acquired. This is especially important if there are multiple lots of HWP involved, and it will be important for the immediate sale of the fractional share. Quicken's entry will adjust all the lots for both HWP and A.

An anomaly of Quicken's method is that reports for dates between the HWP acquisition (1998) and the spin-off date (6/2/2000) will be wrong. Any report for a date during that time will show that there were shares of A in the portfolio, but we know that A did not exist until 2000. This also has been discussed here several times; I don't know of any final resolution.

Since the year of HPQ's sale is "closed", the IRS cannot demand any more tax for that year by correcting the basis reported. The taxpayer also is barred from changing the calculation for that year. But the taxpayer is NOT barred from correcting the basis of stocks sold in any open year - including 2006. So the proper basis should be used in reporting 2006 gains and losses. If the taxpayer enjoyed a slight windfall, that can't be helped. If the error had been in the other direction, the IRS would keep any overpaid tax resulting from it, and the taxpayer could not file a claim for refund at this date.

While "two wrongs don't make a right", tax rules require us to sometimes "let sleeping dogs lie".

RC

Reply to
R. C. White

Hi RC, Thank you for all your kind help. Yes, if I had kept good records and made good calculations when the spinoffs occurred then the sales would have been simpler to calculate the tax consequences of.

I decided, for my 2006 taxes, to just do it right. I have no idea if I did the prior years' taxes correct and I'm not inclined to made an amended return just to correct what will almost certainly turn out to be minor errors either in my favor or in the IRS' favor.

I hope that's legal. Sue

Reply to
Susan Grossman

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