How should I handle a stock acquired by spinoff?

Verizon sold its wired communications to Frontier Communcations (FTR). As a result, suddenly as of 7/2 I own 0.24 shares of FTP.

How do I enter this transaction in my Q2010 investment register(s).? I want to show cost basis I think, but this is not purchased stock, nor a gift. How on earth do I account for it?

Reply to
Keith Snyder
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Hi, Keith.

Use Quicken's Corporate Securities Spin-off transaction wizard to record this. No, this was not a gift and your cost basis is NOT zero. Your former cost basis in Verizon is now allocated between your VZ, which you still have, and the new FTR shares. If you were entitled to a fractional share, that was sold immediately and you received cash. Record this cash received as a sale of the fractional share, using its newly-computed basis as its cost, and showing its acquisition date as the date when you acquired the Verizon shares.

The wizard works well for most such spin-offs - with one important caveat: It asks for "cost" of the old and new shares. But THAT is what Quicken will be calculating, based on information you supply. What you must enter is not "cost", but FMV (Fair Market Value) of the VZ and FTR shares immediately after the spin-off. Those FMVs should be available from Verizon very soon, if not already.

Test Quicken's allocation by comparing your total basis of VZ + FTR now with your pre-spin-off cost of VZ. The only difference should be the cost of the fractional share.

Verizon doesn't make it easy to navigate their site, but I eventually found this page, which spells out the complicated transaction (in 443 pages of dense prose which, of course, I have not read!).

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A one-paragraph version is in Investor News at
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62 This page, dated July 1, 2010, says in part:

"Verizon stockholders are receiving one share of Frontier common stock for every 4.165977 shares of Verizon common stock they owned as of June 7, 2010. This is equivalent to approximately 0.24 shares of Frontier common stock for each share of Verizon common stock owned as of June 7, 2010. Verizon stockholders are receiving cash in lieu of any fraction of a share of Frontier common stock."

I've been retired for nearly 20 years, Keith, and the rules may have changed, so be sure to check with your own CPA to be sure that this is still the correct treatment.

RC

Reply to
R. C. White

Thank you very much. I had a vague understanding that VZ cost basis is reduced by the amount of the spinoff, and I was going to go from there, treating the cost of FTR on 7/2 sort of like a Return of Capital for VZ. Instead I'll go looking for the spinoff wizard.

Again, thank you.

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Reply to
Keith Snyder

Hi, Caryl.

Your misunderstanding is a common one - and natural. And Fidelity's use of zero basis makes sense in their case because they don't have correct information; that's about all they could do. And when they allocate zero between VZ and FTR, they'll calculate zero for both of them. ;^}

When I was in practice as a public accountant specializing in taxes, one of my standard lines was that the only place we would find "fair" in the Internal Revenue Code was in "Fair Market Value" - and nobody could agree what that is. :^{

FMV is a matter of opinion, and everybody may have a different opinion. The definition is "the price at which the property would change hands between a willing buyer and a willing seller, with both having knowledge of the facts and neither being compelled to act". For securities listed on a stock market, we have evidence nearly every day as to the RANGE of FMV, but a stock can change at different prices within that range all day long. For convenience, we generally regard the day's Close as the FMV of the stock on that day. But the IRS uses a more complex formula (that I never memorized) involving the average of the high and low for the day.

For a spin-off, the code specifies the fair market value immediately after the transaction. We can't use the value before the spin-off because FTR did not exist at that time. The Open prices the next morning might be the most useful values. Fortunately, the companies have armies of tax lawyers and accountants they they generally produce an announcement within a few days after the spin-off stating their determination of FMV, and if we use those values, we are not likely to get an argument from anybody.

Note that we can't just do a simple allocation unless we have a simple

1-to-1 exchange ratio. The VZ shareholders received "approximately" 0.24 shares of FTR for each share of VZ held; the actual formula was one share of FTR for each 4.165977 shares of VZ, which calculates to about 0.2400397, which means that a holder of 1,000 VZ would receive 240 whole shares of FTR plus a check for the value of about .04 share. The arithmetic of the spin-off would require the shareholder to allocate the original VZ basis among the 1,000 VZ and the 240.04 FTR. Then he would need to divide the total FTR share of the basis by 240.04 to get the basis-per-share of his new FTR holdings. (The total VZ recalculated basis would be divided by 1,000, of course.) Then he must report the sale of the .04 share; the selling price would be the amount of the check he received and the cost would be the calculated basis of .04 share. (At today's close of $7.15, that check would be about 29 cents.)

Fortunately, once we plug the 0.24004 into Quicken's wizard, most of this should be calculated for us.

RC

Reply to
R. C. White

Hi, Keith.

You are welcome, of course.

See the Reply to Caryl that I just posted. You didn't say if you have 1 share of VZ or a million, but the wizard should handle the calculations either way. ; this. No, this was not a gift and your cost basis is NOT zero. Your

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Reply to
R. C. White

FWIW, in the Tax Forum NG, there's a discussion about cost basis, and one of the posters suggested this new site:

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, In the spinoffs section
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there's a line indicating a recent entry: "Frontier Comunications (FTR) simultaneous spinoff/merger from Verizon (VZ)". Although I didn't go there, supposedly there's a calculator on this site that is pre-filled in with information on this specific transaction.

(PS: Since they can't get the spelling of 'Communications' correct (in the directly cut/pasted text above), already I'm a little concerned about their accuracy!)

Reply to
Andrew

Hi, Andrew.

Thanks for that link! I had seen the site mentioned somewhere but had not checked on it. A quick look makes me optimistic that it will be very useful to many investors.

The calculator for FTR looks right (and they spelled Communications correctly on the drop-down list). They might need to provide more decimal precision, especially for large shareholdings. I plugged in sample numbers of 1,000 shares of VZ purchased 1/10/10 for $20,000, then clicked Submit; the answers looked right to me. ;

Reply to
R. C. White

It's 395 shares of VZ. There were two lots with fractional differences because Fidelity routed the purchase through NYSE and their own broker. And it's 94 shares of FTR.

But I can't find the spinoff wizard! I'm using Quicken 2010, and I can't find it!

How do I get to the wizard?

BTW, I really appreciate the better understanding you give me. I'm also using GnuCash, which is not user friendly. In GnuCash I will have to do the whole thing manually.

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Reply to
Keith Snyder

Thanks. That does the trick.

Keith,

Since no one has responded to this yet, I will, although I use Quicken

2008, not 2010, and since I misinformed you earlier about how to handle the Verizon spin-off I am not sure you should take my advice!

If Q2010 works the same as Q2008 on this, on the Investing Register hit Enter Transactions and in the next window use the drop-down arrow at the top to find Corporate Securities Spin-off. That will bring you to the spin-off wizard.

Caryl

Reply to
Keith Snyder

I want to thank everybody for their help and pointers. I think you proved that the only stupid question is the unasked question.

I'm now researching the same thing for GnuCash which doesn't have any such nice wizards.

Reply to
Keith Snyder

Sure, np! I enjoyed, btw, your 7/7 9:54 PM on FMV, I must say. I didn't realize it was that complicated....I should have guessed anytime the IRS comes into the picture, it becomes so!

Reply to
Andrew

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