spin off

If you can afford shares, you can afford to pay for professional advice--call a professional OR, GOOGLE it.

Go to the web sites of the companies involved. Usually the company that does the spin off will explain on its stockholder page.

Or else wait for mailing that you will receive.

Eric

Hi, Blair.

This topic comes up at least a couple of times a year here, so the archives are rich with information about spin-offs.

The simple explanation is that cost of the original shares is allocated on the ratio of FMV (Fair Market Value) of the old and new shares immediately after the transaction.

Quicken's wizard (formerly called Easy Actions) for Corporate Securities Spin-Off handles it correctly, but still (in Q2008 Deluxe) has a long-standing misleading caption that causes confusion. Where it asks for "Cost per old share ___ (post spin-off)" and "Cost per new share ___", it should ask for FMV per share immediately after the spin-off. "Cost" of the shares is what we are trying to determine, so we don't know those numbers until the calculations are done.

Everybody knows the FMV of the old shares before the spin-off, but nobody knows until "the morning after" how much of that value is represented by the assets that are about to be spun off. After the transaction, the prices at which the deflated shares of the original company trade, and the prices paid for the new shares, can tell us what percentage of the original value was attributable to the assets spun into the new company. If the shares of the spun-off company sell for $20 and the old shares now sell for $80, we can calculate that 20% of the value of the previous whole package was attributable to those shares. So we allocate 20% of what we paid for our original shares to the shares in the new company that we receive, reducing our basis in our original shares to 80% of what we actually paid for the whole package.

That simple example assumes a 1-for-1-share spin-off. If we receive 5 shares of the new company for every 1 share that we hold in the old company, then we must multiply the per-share FMV of each new share by 5 to see how much of the original value is represented by the spun-out assets.

Obviously, nobody can do anything but guess about these ratios until some actual transactions have taken place AFTER the deal. And there are several different ways to determine those FMVs (opening transaction on the day after, closing quote that day, average of high and low - and others). But the parent company's lawyers, accountants and investment bankers will produce their version within a day or two after the transaction and we can be pretty sure that the IRS will not disagree if we use those values. As Eric said, all the details we need - except how to enter it in Quicken - will probably be on the parent company's website in less than a week, probably under Investor Relations or some similar heading. (We can probably help you find the page if you tell us the name of the company.)

In Quicken, just follow the steps, making sure to enter the per-share FMVs, not the cost, of old and new shares, and Quicken should do the rest. If you held multiple lots of old shares, Quicken will adjust each of them automatically. The only caveat is that, if you look back to a historical point before the spin-off, you will see shares of a spun-off company that didn't even exist at that time. This is because the tax rules treat the new shares as though they were acquired when the original shares were acquired. Just remember to watch out for this tax code provision which can't easily be handled in a program like Quicken.

Remember that I've been retired for over a dozen years, Blair, and tax rules change daily, so be sure to check with your own CPA to be sure that my explanation is still accurate and current.

RC

Which company? You should be able to find information online at the company website.

Thank you rc and eric. Eric sent me a method that I used before I placed my inquiry on the web site but was in hopes Quicken had a short cut like for a return of capital using RC under action, somehow keeping the original acquistion date. I'm on a MAC and quicken 2006 and am not familiar with the Quicken's wizard.

Blair

"R. C. White" wrote:

And if those original shares were acquired by years of dividend reinvestment, all of which you've dutifully entered as individual transactions, be prepared for a symphony of kerchungs as each one is adjusted in succession. I shudder to contemplate what might be necessary if such a spinoff needed to be edited :(

Else, the company's web site, under investor information, should have something. After I sent my first reply, I opened my snail mail, discovering that Altria had spun off Philip Morris. Now, for 2008 taxes, I will have to deal with it. Usually a better deal to split the cost base between the old and the new shares, rather than to declare the value of the new shares as income. In Canada, we SOMETIMES have that option.

I have to disagree with that last sentence. A little bit of simple programming - I think - should allow Quicken to present a logical and correct result of a spin-off, i.e., correct basis allocation between old and new companies, correct tax acquisition dates for lots of new company stock, and the "appearance" of new company stock in Quicken's registers as of the date of the spin-off, not years before the new company existed as a stand-alone entity as Quicken does now. Maybe it's harder to do this programmatically then I'm anticipating it is, but I don't think so. The spin-off wizard has been a problem for years and I'm surprised Quicken has never addressed it.

Tom Young

I suspect it's more a question of the relative net benefit of making the change. There is undoubtedly a long list of "things to do" for Quicken; Intuit isn't stupid, so they probably weigh the costs and benefits of each of the items on that list and act accordingly. Virtually none of the information required to determine what's in the to-list, the cost, the benefit, and the relative position of the net-benefit on the to-do list, is available to anyone outside Intuit. But Quicken's market share indicates that Intuit does a pretty good job deciding what to put in and what to leave out.

Still, users aren't stuck with Quicken's output for a spinoff: you can change the results so the ownership of the new security begins on the date of the spinoff and the cost basis/acquisition-dates remain correct.

Modify the "Buy" transactions to be "Shares Added" transactions, with the date purchased in the "Date Acquired" field and the cost in the "Total cost" field, and change the transaction date to the date of the spinoff. [When you change the transaction from Buy to Shares Added, Quicken should fill in the fields for you; the only "change" needed should be the transaction date.]

Then, since there are no longer any Buy transactions to soak up the cash from the return-of-capital transactions, change those RtrnCap transactions to "transfer" the cash to the same account where the return-of-capital transactions are entered.

Still, I too would prefer it, if Quicken did it that way and saved us the effort ... all other things being equal.

Hi, Tom.

You wouldn't disagree if I had worded it better... ;^}

I should have said that the conflicting date problem can't be handled easily in Quicken by us mere users.

I haven't done any programming since about GW Basic (early 1990's?) and I'm sure I could not improve Intuit's code. But, like you, I would expect that Intuit's programmers are entirely capable of working out the solution, given enough time and motivation. As John said, Intuit no doubt has its own priority list and the problems of reconciling tax rules with The Real World are apparently not high on that list. Surely they could at least change the word "cost" to "fair market value' in that spin-off wizard, though!

The real problem, of course, is that Congress intentionally created this fiction that the spun-off shares were acquired on the date that the parent shares were acquired. That is true in a way, but not in a way that can easily be recorded in an accountant's set of books - or in Quicken. That provision usually benefits taxpayers by letting the new shares qualify for long-term capital gain treatment much sooner than if the holding period for the new shares began on the date of the spin-off.

But there are many tax provisions that cannot be reflected in the accounting records. The most glaring, I suppose, is the personal exemption. There is just no good way to make an accounting entry for that. And the Standard Deduction is about as bad. Not to mention trying to account for the (7.5% of AGI) "threshold" for medical deductions. For all these provisions that vary from accounting theory and practice, about all we can do is keep good memo records so that we can reconcile tax rules with accounting rules.

And, for us mere users, there is just no way that I know to make our Quicken records accurately reflect both the real world and the tax fictions, including the one about pre-spin-off holdings of spun-off shares.

I'm sorry I didn't make my meaning clear in my first message, Tom. It reminds me of a quote I saw long ago in The CPA Handbook. It said something like, "It is important to write so that you can be understood. But it is even more important to write so that you cannot possibly be misunderstood."

RC

However, there appear to be bugs in this wizard beyond what I'll call the "style issues" you've discussed; I mentioned a problem back in

You are correct that Quicken probably does approach issues like this on a cost/benefit basis, however their near-monopoly in the personal finance arena doesn't give them much incentive to fix problems like the spin-off wizard, an issue that flies below the radar of most users.

Tom Young

It hasn't been addressed because your solution is wrong. Quicken does it correctly as it is. The spinoff shares are "acquired" on the same date as the original shares, not on the date the new shares first trade.

Ira Smilovitz

Well I kindof surmised then may be no easy answer but appreciate the various comments.

Blair

Ira Smilovitz wrote:

No, they are acquired on the date of the spin-off because they didn't exist in your portfolio before that and Quicken's presentation in that manner is pure fiction. For tax purposes, and only for tax purposes, they are considered to be acquired "way back when" but reality and tax law don't have much in common.

Quicken has a separate field called the "date acquired" field, not the same as the "transaction date" field, that can and should be used as part of their programming of the wizard to maintain the one date for tax purposes and the other date to reflect the reality of the spin- off.

As JP has said, Quicken hasn't fixed this because their cost/benefit calculation hasn't motivated them to do so.

Tom Young

No. If you buy a pizza pie, take away 2 slices and call those two slices a tomato pastry, it doesn't change anything. Those two slices were part of the original pizza, you still own the whole thing and you acquired both parts (the remaining 6 slices and the tomato pastry) when you bought the pizza.

Ira Smilovitz

Hi, Ira.

If you bought 100 shares of BIG Corp. on 1/1/99 for $10 per share and it was worth $20 per share by November 30, 2006, your 11/30/06 financial statement would show 100 BIG, cost $1,000. The $2,000 current market value would not appear in statements prepared on the cost basis in accordance with GAAP (Generally Accepted Accounting Principles). Your 6/30/06 statement would also show - correctly - that you held 100 BIG at a cost of $1,000 as of that date.

If BIG spins off assets of one of its businesses into a new corporation called SPUN on 12/15/06, and you get 20 shares of SPUN, then by December 31, you will have 100 shares of BIG AND 20 shares of SPUN. You would have allocated your $1,000 basis to the new shares based on the ratio of FMV of BIG and SPUN on 12/15/06, immediately after the spin-off. If BIG shares sold for $17 each after BIG no longer owned the SPUN assets, and if the first sales of SPUN's new shares were at $15 each, then the 100 BIG that you still own would be worth a total of $1,700 and the 20 shares of SPUN that you received would be worth a total of $300. The total value of your BIG and SPUN would still be $2,000. You would allocate 1700/2000 of your original $1,000 basis to your 100 BIG, reducing your basis to $8.50 per share, total $850. Your SPUN basis would be 300/2000 of $1,000, or $150, or $7.50 for each of your 20 shares. Your total basis in all your shares would still be $1,000 ($850 + $150).

Now, if your accountant prepares a financial statement for you as of

Even if we switch from GAAP to market values for any of those interim financial statements, we will still have a problem. It will still show that we owned both BIG and SPUN shares on that date. How will we show the market value of our 20 shares of SPUN on 6/30/06? We won't be able to find quotes for SPUN on that date because no such shares were for sale back then. I suppose we could show 20 shares at zero value, but that would look kind of awkward.

THAT is the problem that we wish Intuit's programmers would fix!

RC

I guess I must have misunderstood part of the original post. I agree with you that if you run a financial report as of a date before the spinoff, you shouldn't see the spinoff company listed as a separate asset. I thought the discussion was about how to reflect the ownership period of the spunoff company.

Thank you for taking the time to explain.

Ira Smilovitz

messagenews:oOOdnXUNP9j1-ZzVnZ2dnUVZ_rKtnZ2d@grandecom...

And, of course, the way Quicken currently works can produce even worse results if SPUN happened to be a public company all along. (That is, BIG owned a minority share of the pre-existing public company SPUN, but you only owned BIG shares.)

In that case if you produced Quicken financial statements as of

Tom Young

Quicken allows you to create two securities and use the same quote symbol. I have to do this for the company that I work for in the 401K - two funds in the same account basically invested in my company's shares and some shares I own outside of the company. Each of these has a unique name. You could possibly do this with a spin off - for example if you owned Del Monte prior to the Heinz divesting of some businesses.

Oilcan

-----Orig> "R. C. White" wrote in

messagenews:oOOdnXUNP9j1-ZzVnZ2dnUVZ_rKtnZ2d@grandecom...

financial

corporation

interim

spinoff, you

thought the

spunoff

And, of course, the way Quicken currently works can produce even worse results if SPUN happened to be a public company all along. (That is, BIG owned a minority share of the pre-existing public company SPUN, but you only owned BIG shares.)

In that case if you produced Quicken financial statements as of

Tom Young