new spinoffs: IAR and VRGY and EQ

Hi, P.

There have been many discussions here about spinoffs over the years. In skeleton form, the steps are these:

1. Visit the websites for the companies involved, especially the parents (Verizon, e.g.) and look for a page called something like Investor Relations. These often have all the data you will need for later steps. Often they even have sample worksheets for you.

1. Use Quicken's built-in method to record the transaction. (In Q2007, choose "Corporate Securities Spin-Off" from the drop-down list in your Investment Register's Enter Transactions tab; earlier versions called it Easy Actions. You did not mention which version of Quicken you are using.)

Remember in Step 2 that Quicken has a longstanding error in terminology on this spinoff screen. It asks for "cost" per old share and per new share. In both places, it should be asking for Fair Market Value of the shares immediately after the spinoff. These values can be found in several ways; the best and easiest is from the web page mentioned in Step 1 above. The goal of this whole transaction is to simply allocate your old basis in the old shares over your old and new shares in the ratio of their post-spinoff values. After the transaction is recorded, your total bases in all the shares should be unchanged from your pre-spinoff basis in your old shares.

1. Often, there are fractional shares involved. These are typically sold immediately after the spinoff as a part of the orchestrated transaction and the shareholder receives cash for the fractional shares. AFTER you compute the per-share basis of the new shares in Step 2, record sale of the fractional new share on the date of the spinoff for the amount of cash received; the gain or loss on the fractional share should be reported on your income tax return. The holding period for determining long-term status is the same for the new shares as for the old.

1. After the spinoff, each issue stands alone. If you sell your new shares (your EQ, for example), report the sale like any other. Use the parent's acquisition date as the date acquired; even if you sold EQ the next day, your gain might be long-term if you had held the Sprint shares for a long time.

Remember that I've been retired for over a decade and tax rules change daily, so please check with your own CPA to be sure that these rules haven't changed.

RC

Hi RC, thanks for this. Verizon's SEC filing specifies that they have a letter from the SEC identifying this spinoff as a 'tax-free' transaction. Does this affect your calculation at all? Or does it perhaps simply mean that no income tax is due on this spinoff, in contrast to normal dividends.

-jim

R. C. White wrote:

tnx for the detailed info. I'm running Quicken 2004 -

I found and grabbed 2 of the 3 tax basis info letters. The 3rd said they would post something by the end of the year.

Since I'm only usually seeing a few dozen new spinoff shares, I usually just fudge something to track the ongoing relative performance. But this time - I thought I would actually go thru the math. Then I have to update the numbers in three multiple locations: Quicken - Brokerage house website data - Brokerage house software app for PC -

yes, i saw that IAR said they would have some information up 'by the end of the year,' which is a little late for making capital gains tax choices. I also did not find anything on the verizon site.

-jim

P.Schuman wrote:

Hi, Jim.

That letter might be from the IRS, rather than the SEC. Companies typically ask the IRS for a "private ruling" that the proposed transaction, if carried out as outlined to the IRS, will qualify under specific sections of the Internal Revenue Code (Sec. 355 if I remember correctly) as a tax-free split-off. (There's a technical difference between a spinoff and a split-off, but I don't recall what it is and it usually is referred to as a spinoff anyhow.) This transaction does not generate a tax currently, but the carryover of the old basis (split between the old and new shares) means that the gain (presumably) that is not taxed now will be deferred until the shares are sold in the future. It really is a "tax-deferred" spinoff, rather than "tax-free".

What I described in my first message IS a tax-free spinoff. If this were a taxable transaction, it would require much different treatment, most likely as a dividend to the shareholders in the amount of the fair market value of the new shares, with the new shares' bases equal to that FMV and their holding period starting on the date of the spinoff - and with the old shares' bases left unchanged. But we don't need to worry about all that, thank goodness!

As I said earlier, check with your own CPA for the current rules.

RC

Hi, P.

My first message was all about the tax calculation, not about evaluating performance of your investments. There are many ways to gauge performance and how you do it it is up to you. But there are specific rules about calculating your "basis for computing gain or loss" for federal income tax purposes. Please don't "just fudge something" on your tax returns! And if you did that in the past, please get some professional advice about filing amended tax returns.

RC