Multiple Corporate Spinoffs (Cendant)

Thanks for your post about the Cendant spin-off. I'm still not getting this correct. Can you help me out?

The only thing I was able to figured out is the new shares issued number. That should be .25 for REALOGY CORP and .2 for WYNDHAM WORLDWIDE CORP. Here is a link to the Tax Basis information from the Cendant website

Thanks, Anth> Cendant is in the process of spinning off several corporations.

Hi, Anthony.

Thanks for posting that URL. Cendant has gone to the trouble to make the calculations for their shareholders. Now all you have to do is figure out how to enter the transaction in Quicken.

First, the key paragraph from that web page:

HOW TO CALCULATE YOUR TAX BASIS

You can use the following worksheet to calculate your basis in your Cendant common stock, Realogy common stock and Wyndham Worldwide common stock, as well as your gain or loss in respect of any cash received in lieu of a fractional share of Realogy and Wyndham Worldwide common stock.

Based on the closing price at which Cendant common stock, Realogy common stock and Wyndham Worldwide common stock traded on August 1, 2006, $2.44, $26.10 and $31.85, respectively, as reported for the New York Stock Exchange transactions, 16% of your pre-distribution tax basis should be allocated to your shares of Cendant common stock; 42.5% should be allocated to your shares of Realogy common stock (including any fractional share interest); and 41.5% should be allocated to your shares of Wyndham Worldwide common stock (including any fractional share interest).

And they have provided a worksheet. Just start with ONE number, which is your basis in your Cendant shares. Plug that number into the worksheet and follow the arithmetic as outlined. Check your first calculations by adding the 3 amounts in the "New total tax basis" boxes; the total should equal your original Cendant basis. Then look at the TWO numbers for "Total number of shares" for Realogy and Wyndham. Knock off any decimal fractions and make sure that the whole numbers of new Realogy and Wyndham shares are what you actually got (or will get). Finally, multiply those fractions by $26.10 for Realogy and $31.85 for Wyndham and make sure those are the amounts of the checks you received for fractional shares.

Now the hard part: entering it in Quicken. The Intuit programmers never expected a company to spin off more than one subsidiary at one time, so the program provides no automatic way to handle it. We have to lie to Quicken and tell it that only Realogy was spun off - and then lie to it again and say that only Wyndham was spun off. For Quicken to get the arithmetic right, we have to include the remaining subsidiary in the parent's value when we record the spinoff of the first sub. And we have to overlook a serious error in Quicken's terminology.

So, start by recording that only Realogy was spun off. In the Enter transaction drop-down list, choose Corporate Securities Spin-Off. Enter the Transaction date (July 31, 2006), the Security name (Cendant) and New Company (Realogy). In New share issued per old share, enter .25 (one for every 4 Cendant shares). In the next two boxes, Quicken asks for "Cost" of the old and new shares. This is a serious error that has been in every Quicken version for many years. What we must enter here is the Fair Market Value (FMV) of the shares immediately after the spin-off transaction. Cendant has given us these numbers, so we should be able to simply enter $2.44 for each "old" Cendant share and $26.10 for each "new" Realogy share. But this is where the lie comes in.

At this point, if we say that ONLY Realogy was spun off, then we must consider that Cendant still included the value of the Wyndham assets. In other words, we must include the value of .2 of the new Wyndham shares (one for every 5 Cendant shares) in the FMV of the "old" shares. So for "Cost" of the old shares, we must enter $2.44 + (.2 * $31.85 = $6.37) = $8.81. For the new shares, enter $26.10.

So, for the Realogy spinoff, enter as what Quicken calls "cost", $8.81 for the old shares and $26.10 for the new Realogy shares.

When Quicken records this spinoff of Realogy, it will reduce your basis of Cendant, so we won't have to lie for the second spinoff.

For the Wyndham spinoff, just enter $2.44 per share for the old shares and $31.85 for the new shares.

Test your work by adding your total basis (including fractional shares) in all 3 companies before you record sales of any fractional shares. The total should be the same as your pre-spinoff basis in Cendant. The Cendant worksheet says that your new Cendant basis is 16% of your prior basis, your total Realogy basis is 42.5% and your basis of all your Wyndham shares is

If this were a taxable spinoff, your treatment would be much different. But, since it was designed by Cendant to qualify as a tax-free spinoff, you will recognize no gain except for sale of the fractional shares, and your "holding period" for the new shares will include the time that you have held Cendant; in other words, your acquisition date for Realogy and Wyndham will be the date you acquired Cendant.

Remember that I've been retired for more than a dozen years, and tax rules change every day. Be sure to consult with your own CPA to see if the rules I remember still apply.

RC

RC,

That was excellent!

I had filled out the worksheep from the Cendant website, but as you know the big problem is trying to get into Quicken.

You are correct about the rounding. I was off by $1 and change on the basis...but no big deal.

Thank you very much for the accurate and detailed explaination.

Thanks, RC. I followed your directions and they seem to have worked fine - almost.

Apparently Quicken now correctly calculates the cost basis for multiple spinoffs. This wasn't the case four years ago.

What I still don't understand is why Quicken puts the Buy and Return of Capital transactions back on the original purchase date of the parent company, in this case Cendant. This causes the spun-off shares to appear in the account long before they are actually there, messing up the historical records, net worth calculations, etc.

The transaction can be corrected by changing the Buy to an Add Shares and put in the correct transaction and basis dates.

The only problem is that the Return of Capital transaction puts cash into the account. The Buy took the cash back out, which the Add Shares does not. This can be fixed by putting the account in as the Transfer Account in the Return of Capital transaction - it magically disappears the cash.

Anyone see any problem with this?

Walt,

I just want to make sure I understand your problem with RC solution. Is your only problem that the dates of the stocks that spin off get dated back to the original purchase date of the first stock? Shouldn't it be that way for capital gain purposes? For example, if I sell one on the newly acquired stocks today, shouldn't I use the purchase date of the original stock since it should be treated as long term capital gain? Do you agree with that?

What other problems do you seem with RC solution?

Thanks for your help.

Anth> Thanks, RC. I followed your directions and they seem to have worked > fine - almost. >

Hi, Walt.

Are you sure? Step by step, in Quicken, how do you handle multiple simultaneous spinoffs from a single corporation?

Yes, sadly, this is what happens in Quicken. :>( It has always been this way in Quicken, so far as I know. To correct the situation would take a large investment of programming effort, I suspect. The program would have to keep track of both the real-life dates and the "as if" dates that the tax code prescribes. (And Quicken can't even keep track of Trade Dates and Settlement Dates for stock purchases and sales.)

Many items that are required on the tax return cannot logically be entered into Quicken. For example, the personal exemption is deducted from adjusted gross income to arrive at taxable income, but there's no "correct" way to get a Quicken income statement to show the correct "taxable income". Another such item is the standard deduction. And how would you enter the

We all know that you did not own Realogy shares before 7/31/06. But, as Anthony said, if you bought your Cendant shares in 2004 and you sell your new Realogy shares this month, the gain (or loss) is treated as long-term for income tax purposes. That is not "generally accepted accounting principles"; that is Sec. 351 (if I recall the number correctly) of the Internal Revenue Code. The IRC was written by Congress, not by accountants - and not by Intuit programmers. It doesn't have to make sense; it's the law!

I know this phony dating causes problems with the net worth calculations you mention, plus ROI and other such investment ratios. That's part of the reason that I long ago quit trying to understand and use Quicken's calculations of such statistics.

Quicken started out to be a checkbook program. It still does that job very well. Over the years, other functions have been added on: investments, taxes, retirement planning and others. It does not handle all of those jobs as well as it does the checkbook function.

If you are showing a Buy, you are doing it wrong. If you show a Return of Capital, then you are doing it wrong. A tax-free spinoff of corporate securities does not involve either a return of capital or a buy. It involves only a split of an existing investment into two (or more) investments. You've bought nothing. None of your invested capital has been returned to you (although you may have received cash for fractional shares you are considered to have sold immediately after the spinoff). For example, if you had held 100 Cendant shares before the spinoffs, you would now hold 100 Cendant, plus 25 Realogy and 20 Wyndham - and no cash at all would have been returned to you.

As always, check with your own CPA to confirm or correct my interpretation, since I've been long retired and the rules may have changed.

RC

I was sure four years ago, but since it works in Q06 there's no point in trying to reconstruct a fixed bug.

It already does that. Enter an Add Shares transaction and you will see that there is a transaction date and a Date acquired (basis date). This was added some years back when they fixed most of their basis date bug. That took them five years to fix, because of the programming effort you mention.

However, although they now have the tools to record a spinoff correctly, for some reason they still don't.

Are you saying that's not how Quicken records a tax-free spinoff? (If so, I disagree.) Or are you saying Quicken does it wrong? (I agree.)

There's no Spinoff transaction in a Quicken register, but the spinoff can be correctly recorded by doing what I suggested in the above post

- entering the spinoff, and then changing Quicken's Buy and RtrnCap transactions (found in the register on the basis date) to Add and RtrnCapX transactions on the spinoff date. The labels might be wrong, but I believe the effect is the same as if Quicken had a proper spinoff transaction.

RtrnCapX to the same account is the same as a basis adjustment. This is useful in other contexts. For example, when I do my taxes and have to record Original Issue Discount (as on a zero coupon bond or inflation-adjusted T-bill), I adjust the basis upward by entering a Return of Capital for >> minus

Hi, Walt.

First, I apologize for coming on too strong in my post yesterday. When I took another look at the Dummy entries I made yesterday to record Cendant's example, I saw that Quicken has CHANGED my entries! I know I did not use RtrnCap or Buy, but that is how the entries are now shown in my Register.

I'm tempted to put the rest of my comments inline, but I want to change the sequence so I'll just quote extensively and add comments...

I've seen some discussion of this here, but haven't experienced it myself. Now, I when I click on one of the transactions that Q changed to "Bought" and then click Edit, I still don't see a place to enter a second date in the Buy window. But when I click on the "Enter transaction" drop-down box and choose "Add - Shares Added", I see that Q changes the window. It leaves most of the numbers unchanged, but adds a "Date acquired" box, with the

In your experience, does this allow Q to produce both proper historical statements and investment statistics (using the transaction date) and proper tax results (using the original date of the C acquisition for all 3 issues)? For example, would a 12/31/05 balance sheet show any shares of Realogy or Wyndham?

I now agree that this is how Quicken handles it. And we agree that Quicken does it wr> There's no Spinoff transaction in a Quicken register, but the spinoff

Agreed.

Now that we agree on "simple" spinoffs of a single subsidiary, let's talk about multiple simultaneous spinoffs from a single corporation.

Do you disagree with my treatment? That is, for the first spinoff, show the FMV ("Cost", as Q calls it) of the parent by including the FMV of any one or more remaining subs. Then, for the final spinoff, use the FMV of the parent only. This works in my dummy transactions, but I haven't had a chance to test it in the real world.

The whole theory of allocating cost or basis in a spinoff. of course, is that the original basis will be allocated in the ratios of fair market values after the transaction. Since Q handles only a single spinoff at a time, the first transaction recorded must allocate the old basis between FMV of the new sub and the parent, but the parent's FMV still includes the FMV of any remaining subs. If there are more than two subs being spun off, then we have to exclude the FMV of subs already spun off, but include any remaining subs. When we get down to the last one, the allocation will be like a single spinoff, using the post-spinoff FMV of the stripped-down parent alone and of that last sub.

I haven't had to do an OID transaction in a while, so I'll let you handle that one. ;>

RC,

Okay, I'm just getting a little confused here. Is the way you initially explained to enter the Cendant spin-off, the correct way to enter it or do any modifications need to be made due to Walt's points?

I entered it in the way you explained it and it seems correct to me. Am I missing something?

I'm not sure if it matter at this time but I'm using Quicken 2006.

Thanks. Anth> Hi, Walt.

When you enter a spinoff, Quicken puts those two transactions in the register. There is no "spinoff" transaction per se.

Right. In a Bought transaction, the basis date is hidden - you can't edit it. When you convert Bought to Add, you can edit both dates. And a good thing too, because you have to swap the dates.

I think so, but I always feel better when someone checks me. :-)

Your treatment is correct. It gets the basis and all the dates correct for tax purposes. (It might not in older versions of Quicken, but Q2006 handles it right.)

The only problem, as we have discussed at length, is that the spun-off stocks appear in the account before they should. My fix takes care of that.

- Walt

RC's method, without any modifications, is fine for the purpose of recording capital gains, display of current holdings, etc.

The only problem is that the past account holdings, values, etc. will be off because the spun-off stocks will appear before you actually got them. This won't bother most people, I daresay.

I suggest you don't worry about it.

- Walt

snipped-for-privacy@gmail.com wrote:

Hi, Walt - and Anthony.

Good! Case closed - I hope. ;( I had my original version all typed, then goofed somehow and lost it. When I had to type it all again, I was impatient - and a little disgusted - so some of the points were made not so clearly. I think the gist of the message came through, but I wonder how it will be interpreted when this question comes up in the newsgroup again a few years from now and somebody finds this exchange in the archives. ;^}

RC

Hi, Anthony.

Sorry for the confusion. Yes, my original explanation was correct. My post from this morning was confusing because my first draft was accidentally deleted and I had to start over - and by that time, my train of thought was derailed.

I was confused by Walt's first response since I had not noticed that Q2006 changed my entries after I made them! It converted them to a RtrnCap and a Buy. That is not correct and it is not what I entered but it gets the right answer in the end, with the added benefit that it preserves both the transaction date and the acquisition date for the spun-off shares.

Also, it's more confusing because of Quicken's terminology ("cost" where it should say "fair market value immediately after the spinoff") and because the program does not provide a way to record multiple simultaneous spinoffs.

We could work this out with pencil and paper in about 5 minutes. The hard part is getting it into Quicken.

RC

It seemed perfectly clear to me.

Perhaps I should seek help ... :-)

- Walt

RC,

I agree, it took me 5 minutes to figure out the allocation on paper but i had so much trouble getting it into Quicken...you would think it should be the opposite way. Anyway thanks again to you and Walt.

Anth> Hi, Anthony.