Spectra spin-off

Here's one way to do it. Calculate the split of your cost basis:

41.89% to Spectra, the remainder stays with Duke. Calculate the per-share basis cost of Spectra: (41.89% x Original Duke Cost Basis) /( # of Duke shares x .5).

Enter a Return of Capital transaction from Duke on 1/2/2007 for the amount of the basis allocated to Spectra and specify the TRANSFER account is the same account you're working in. Quicken will record a RtrnCapX transaction that won't affect cash in the account but will affect the Duke basis.

Enter a Shares Added transaction for the Spectra shares on 1/2/2007 with a per share cost as previously calculted. Enter the "Date Acquired" date as the date of your original purchase of Duke. Quicken will record an Added transaction that likewise won't affect cash in the account but will get the basis and date acquired correct.

Tom Young

You have much more knowledge than I about these things; but doesn't your approach assume that all of the Duke shares were purchased in a single lot? (Not an unreasonable assumption based on the op's statement.)

I think that for those whose holdings were purchased in multiple lots, there is a benefit to using the Quicken corporate spinoff transaction ... even though, my understanding is that the results would be improved if the Quicken generated return-of-capital transactions were modifed to take the cash from the investment account, and the generated "buy" transactions were changed to "Shares Added" transactions, assigned the original cost basis, with a transaction date matching the date of the spinoff. (Doing what you recommended for one lot; for multiple lots.)

I'm thinking that the more original lots there were, the more sense it makes to start with the Quicken spinoff transaction, then plan to modify its results.

Per my limited understanding (someone correct me if I'm wrong) you shouldn't use a Return of Capital transaction for a Corporate Spinoff, especially if you own multiple lots of the stock. The two have different rules for computing the adjusted cost basis (ACB) of the lots of the original stock, as the following oversimplified and exaggerated example illustrates:

Assume you bought 1 share of A at $5 and another at $50.

If there is a Corporate Spinoff of B with a value of $11 per share of A, you then have a total cost basis for B of $22. This is 40% of the original $55 basis for A and leaves a $33 ACB for A (60% of the original cost). The ACB of the two shares of A is $3 (60% of $5) and $30 (60% of $50).

However, if there is a Return of Capital of $11 per share of A, the $11 is subtracted from the cost basis of each share of A, regardless of its original cost. This results in an ACB of -$6 ($5 - $11) and $39 ($50 - $11) for the original shares of A. For tax purposes the -$6 is treated as $0.

Unfortunately, Quicken versions up to Q2005 (or possibly Q2004) did not make the above distinction, and not all cases are fixed even for later Quicken versions (sigh). I discovered this problem the hard way when Quicken told me I had a Capital Gain of over $13,000 on a sale that *grossed* less than $5,000.

A word to the wise...

The solution is proper for a one-time purchase of Duke Energy but can be expanded to mulitple purchases by making the above calculations and entries for each lot. I probably should have said that explicitly but didn't as I was running out the door at the time.

The problem is that Quicken, at least in the 2004 Deluxe version I'm using, screws up all your prior accounting. If you go back and look at your portfolio for times prior to the spin-off you'll see the parent company carrying a value of (# of shares x old stock price at that time) but a cost basis reflecting the post-split basis. Accordingly, the unrecognized gain on the stock is wildly overstated.

The spun-off stock will be there too - even though it didn't really exist at that time - with a value equal to cost basis, i.e., no recognized gain.

As far as I know the method recommended is the only one that preserves the historical accounting and reflects the historical situation properly.

Tom Young

The problem with your example is that the amount of basis allocated to B is properly stated as a percent of your basis in A, not a fixed amount. If the spinoff allocates 40% of the basis in A to B (and assuming you get one share of B for each share of A) then you have one share of B with a basis of $2.00 (.4 x $5) and one share of B with a basis of 20.00 (.4 x $50) or two shares of B with a total basis of $22, an average of $11 per share. Do the calculations, make the entries (2 of them) appropriately and all will be right with the world.

Tom Young

I didn't focus on this last paragraph appropriately. As long as the person making the entries understands what needs to be done, then letting Quicken make the entries and modifying them probably *is* quicker. I just don't think most folk understand the problem. I know I'm always forgetting this limitation in Quicken and have to re-invent the wheel each time I come across a spinoff and then noticing that prior periods are showing inappropriate results.

Tom Young.

Never do a cost per share calculation because that results in either share or dollars having errors and can make subsequent transactions problematic.

The total dollars received in a return of cap is the sum of the % allocation of cost calculated for each lot.

Then take the total cash received (Q adds it up for you) and add the actually acquired shares, whole AND fractional, to the account. (Q calcs the per share cost).

Now sell any fractional shares using the actual $$ received for the fraction which will either result in a Cap gain or loss which IRS attributes to the date of purchase of the original shares. If you have multiple lots involved then use the date which results in the long/medium/short cap gain you want but you may have to modify the Q report for cap gains.

No, it's perfectly OK to do a cost per share calculation. (Number of share rec'd, including fractions) divided by (total $'s of basis allocated) = Cost Per Share.

(Cost Per Share) times (Number of share rec'd, including fractions) Total $'s of Basis Allocated.

It's simple math. Since you need the Cost Per Share for the Shares Added transaction you need to do the calculation. You can only get it wrong if you enter one of the number incorrectly in your calculator.

I typically use the Windows calculator for my Cost Per Share calc and then copy and paste it right into Quicken, making sure the product of shares time price comes back to the allocated cost.

Tom Young

430 No such article 222 14230 body

Eric Bloch wrote:

No, it's perfectly OK to do a cost per share calculation. (Number of share rec'd, including fractions) divided by (total $'s of basis allocated) = Cost Per Share.

(Cost Per Share) times (Number of share rec'd, including fractions) Total $'s of Basis Allocated.

It's simple math. Since you need the Cost Per Share for the Shares Added transaction you need to do the calculation. You can only get it wrong if you enter one of the number incorrectly in your calculator.

I typically use the Windows calculator for my Cost Per Share calc and then copy and paste it right into Quicken, making sure the product of shares time price comes back to the allocated cost.

Tom Young

Tom,

I wasn't addressing the entire spinoff problem and didn't intend to critique any of the other discussions. Perhaps I should have stated this clearly.

I didn't say, or intend to say, anything about the cost basis of the shares of B or the historical data for the lots of A or B. These issues are far beyond my ability to solve with Quicken as it now stands. I applaud all of you for trying to address the whole problem.

I was focusing solely on the cost basis of A and how, per my understanding, it is affected differently depending on whether you are given $22 worth of B in a spinoff or a $22 return of capital (perhaps as a $22 check).

If you use Quicken's ROC transaction for a spinoff, Quicken will incorrectly proportion the $22 cost reduction among the lots of A. If you have many lots of A bought over an extended period of time at widely varying prices you may end up with an absolute mess for the cost bases of the individual lots. I just wanted to make sure everyone was aware of this part of the problem.

Jerry

Jerry,

I used my test database and actually entered the following transactions:

01/01/2006 ADDED 1 share A @ $5/sh, acquired date 01/01/2006 01/01/2007 ADDED 1 share B @ $50/sh, acquired date 01/01/2007

I then did an ROC transaction on for $11 on 01/05/2007 and looked at my lots of A. The first lot reflected a basis of $4 and the second lot a basis of $40, correctly.

I then deleted the ROC transaction.

Next, I entered this transaction:

01/05/2007 (Corporate Securities Spin-off) Security Name: A New Company: B 1 share new for each old share $22 Cost per old share ($44 total) $5.50 Cost per new share ($11 total)

and looked at my lots of A. Again, the first lot reflected a basis of $4 and the second lot a basis of $40.

In either case it looked like Quicken calculated the basis of A, in total and by lot, correctly.

Tom Young

What version of Quicken? This isn't the way I recall things worked in Q2002 and prior versions (although online updates to those versions may have changed things for people still running them!).

Also, I thought that an $11 ROC for 2 shares should be treated as $5.50 per share. This would give bases of -$0.50 and $44.50 for the two shares. Common sense (and not tax expertise) tells me that if you are returned $5.50 for each share of stock that you own you should reduce the cost basis of *each share* by $5.50.

Am I incorrect about this? Have tax laws for ROCs changed recently? Is there more than one type of ROC, each having different rules for computing the adjusted cost bases of separate lots?

I haven't used the ROC transaction since Q2002 or earlier. I now have Q2006H&B and don't recall having seen the "Market Value" box. Can someone explain how this affects the ROC calculations? Does a non-zero value in this box cause the ROC transaction to use the tax rules for spinoffs (see below)? If so, then I withdraw my warning about using the ROC transaction for spinoffs for Quicken versions that have this box.

This always confuses me. Does anyone else think the word "Cost" should be replaced by something like "Market Value at time of spinoff"?

I wish Quicken would let you enter percentages for the value of the old and new shares because I've (eventually) been given these percentages for most of the spinoffs I've dealt with.

This reflects my understanding of how spinoffs should work. You have spunoff

20% of the value of the original stock and retained 80% so the cost basis of each original lot should be multiplied by 80% to get the new basis.

A couple of years ago I performed this spinoff calculation in both Q2002 and Q2003 and got the wrong answer. Since I didn't have Q2005 (the then current release) R.C. White tried the same experiment for me in Q2005 and got the correct answer, which I verified when I upgraded to Q2005.

However, the Q2005 spinoff transaction still didn't work correctly for my real-world case, probably because of complexities caused by additional spinoffs, acquisitions, stock splits and sales. I always get the correct

*total* adjusted cost basis for the original stock, but I gave up hope on getting the correct bases for the individual lots. I've pretty much resigned myself to selling my entire position in the original security, when practical, and doing things by hand or by guesstimating when I sell only part of my holdings. For the spunoff company I use the same cost basis for each share (even though I know I'm not supposed to) and try to dump my entire position ASAP. If you've dealt with ESOPs for AT&T and DRIPs for its spinoffs since 1969 you might understand this sloppiness.

I never have a problem with the total basis of either the original or spunoff stock, only with the bases of the individual lots.

This is in Q2004. I used to use Q2002 and I don't think things have changed since then, but can't be sure.

Well, another common sense way to look at it is that you're returned $1 for one share of A and $10 for the other share of A. This is implicit in the way these calculations are talked about in the information disseminated by the companies. They don't talk about "so much per share," they talk about percentages. In this example the information statement would read along the lines of "...80% of your basis would be allocated to A common stock, and the remaining 20% would be allocated to the shares of B common stock you received in the distribution." There's nothing wrong with your common sense notion, it's just not how these things are structured from a tax standpoint, and the requirement of taxes drives the accounting. As far as I know - I'm no expert - this is the way it's worked for some time for taxes.

Don't have Q2006 so I'm no help here, but, in line with your following comment, I suspect it's designed to replace that confusing word "cost."

They're trying to guide you through one way of doing the calculation for share cost post-split which is based on market prices per share of the stocks, so using the word "cost" right in the calculation *is* confusing.

There certainly *was* a bug in Q2002 caused by intervening sales and transfers of the parent companies stock, as I documented in my post "Bug in Corporate Securities Spin-off in Quicken 2002" back in May,

2002. Quicken went back in time and altered gains on sale of parent company stock, mis-calculated the current basis of the parent company stock, and the changes in gain on sale *didn't* equal the mis-calculation of basis, leaving me with a "black hole" mystery!

Since that time I've *always* done my own calculations and entered my own RtrnCapX and Added transaction(s).

Tom Young

Hi, Nemo.

This subject is discussed regularly here, every time a major corporation has a spin-off, it seems.

You didn't give the URL for the page you saw, but it probably was this one for the spin-off of Spectra Energy from Duke Energy: TAX INFORMATION FOR SPECTRA ENERGY SPIN-OFF

This appears a straightforward spin-off (not like some of the AT&T deals we've discussed here) and Quicken should handle it quite easily.

Use the Corporation Securities Spin-off dialog. You didn't say which version of Quicken you are using; there have been minor changes in the dialog over the past few years, but the substance remains the same. The goal, of course, is simply to allocate your original basis in your DUK shares among the old DUK and new SE shares in the ratio of their Fair Market Value immediately after the spin-off. This can be done in several ways; the best is probably the way Quicken does it. The only part that irritates me is that Quicken persists through many successive versions to ask for the "cost" of shares after the spin-off. It should ask for FMV, because the cost is what you are trying to compute! There are several ways to determine the FMVs after the spin-off; Duke's method seems unusual to me, but it probably doesn't matter very much and the IRS probably will not challenge your use of those numbers.

Using the numbers in your post, I would enter this in the Quicken Corporate Securities Spin-off window (Q2007 version):

Transaction Date: 1/2/2007 Security Name: DUK New Company: SE New shares issued: .5 per old share Cost [actually FMV] per old share: $19.25 [post spin-off] Cost [actually FMV] per new share: $27.75 (Leave the "taxable spinoff" box unchecked)

Note that you do not actually enter your original cost basis for Duke or the date(s) of acquisition, and you don't enter the number of shares of either company. What is important here is the RATIO of FMV of each share of your old DUK stock to the FMV of the number of shares of SE that you got per share of DUK. All the rest of the numbers can be calculated from this ratio. In fact, Duke has already calculated this ratio (58.11% : 41.89%). But note that the 41.89% is for a HALF share of SE; the 58.11% is for a whole share of DUK. So if your original basis in DUK had been $100.00 per share, your new basis would be $58.11 per share of DUK and $83.78 per share of SE. If you started with 100 shares of DUK @ $100 = $10,000.00, you would end with 100 shares of DUK with a total new basis of $5,811, plus 50 shares of SE with a total basis of $4,189 (50 * $83.78), and your total basis for

100 DUK and 50 SE would still be $10,000. If you held multiple lots of DUK, Quicken should apply the basis recalculation to each of them and show multiple lots of SE after the spin-off.

As John Pollard points out, Quicken's handling of this is not retroactive. If you look at your Portfolio in Quicken for a date when you help DUK prior to the spin-off, you will see SE shares that you did not actually hold at that time. I'm not sure how to handle this, except to recognize that it happens and adjust for it.

Remember that I've been retired for over a dozen years, so check with your own CPA to be sure that I've not forgotten more than I ever learned about this - and that the rules haven't changed since I stopped watching.

RC

Tom,

We're talking about ROC's here. If you get stock in a new company that's not what I call a Return of Capital - it's what I call a Corporate Spinoff.

Here's what I call an ROC:

Years ago I owned Seligman Communications (a mutual fund) and they were making money so fast they couldn't find places to invest it. So they gave money back to the investors as a cash payment. It wasn't a dividend because no tax was due on it. They were just giving back some of the investors' money (i.e. they were "returning capital"). Since you got a fixed tax-free $ amount for each share you owned you were instructed to reduce your cost basis for each share by that amount. That's what I call a Return of Capital and that's how the Quicken ROC transaction used to work. Unfortunately the Corporate Spinoff transaction (prior to Q2004 or Q2005) used to also (incorrectly) work this way.

In short, old Quicken versions used to subtract a fixed $ amount per share for both ROCs (correctly) and spinoffs (incorrectly).

If I believe your tests, Q2004 now multiplies bases by a fixed percentage for both ROCs (incorrectly) and spinoffs (correctly).

Perhaps, as I stated before, tax laws have changed for ROCs or perhaps the term has lost its traditional meaning.

Jerry

P.S. In your ROC experiment, did you put a value in the "Market Value" field? If so, could you try it again without a Market Value and see if it gives a different answer. No problem if you don't feel like trying this - I know I'm too lazy to do it and, besides, I now have a huge headache :-)