Cost basis for shares which spun off of Hewlett Packard (HPW->HPQ->A->VRGY)

I wish this wasn't so difficult to figure taxes out on a hundred shares of stock! Here is what I have figured out so far. TAX EVENT 1: In 1998, I paid $5,475.40 for 100 shares of Hewlett Packard (HWP). TAX EVENT 2: On June 2, 2000 I received .3814 shares of Agilent (A) for each share of HWP, resulting in 38 shares of Agilent with the .14 share fraction being paid to me in cash. Agilent was $81.75 on 6/2/2000 so .14 shares x $81.75 $11.45 cash. I calculated a cost basis for Agilent in 2001 of: Cost basis of A = (Cost of HWP - Value of .14 share of A) * 22% Cost basis of A = ($5,442.45 - $11.45) * 22% Cost basis of A = $5,431.oo * 22% Cost basis of A = $1,194.82

TAX EVENT 3:

100 shares of HWP turned into 200 shares of HPQ, and HWP ceased to exist. Not only was this a 2:1 split, but the symbol changed from HPW to HPQ. I don't think this incurred any taxes though. TAX EVENT 4: I sold the 200 shares of HPQ for $5,307.87 in 2001. The cost basis I used for HPQ on my 2001 taxes was: Cost basis of HPQ = (Cost of HWP - Value of .14 share of A) * 78% Cost basis of HPQ = ($5,442.45 - $11.45) * 78% Cost basis of HPQ = $5,431.oo * 78% Cost basis of HPQ = $4,236.18

My 2001 tax records show the gain I paid taxes on was: Long-term Gain = Sale basis for HPQ - Cost basis for HPQ Long-term Gain = $5,307.87 - $4,236.18 Long-term Gain = $1,071.69

TAX EVENT 5: On November 1, 2006, each share of Agilent spun off 0.122435 shares of Verigy (VRGY) resulting in 4 shares of Verigy (VRGY) for my 38 shares of Agilent with the fraction being paid to me in cash. I guess I first have to figure out how much that fraction was. TAX EVENT 6: I finally decided to put an end to my tax calculation misery on this stock, so, in December of 2006, I sold the 38 shares of Agilent for a total of $1,222.39. I guess I can't figure out the loss incurred until I figure out what the lousy fractional share was worth and what the new cost basis of Agilent was given it spun off Verigy. TAX EVENT 7: At the same time, since the Verigy calculations caused more misery than the stock was worth, I also sold the 4 shares of Verigy for a total of $56.48. Does all of this make any sense to you experts? Am I going in the right track at least? I wish they didn't make this so miserable for nothing. Sue

REFERENCES: Agilent to Verigy spinoff calculations:

Hewlett Packard to Agilent spinoff calculations: Hewlett Packard HWP to Hewlett Packard HPQ stock split calculations: So far, I read everything above and here's what I've calculated so far which may help other Hewlett Packard share holders. Moderator: www.tiny.url converts long URLs into URLs that are significantly easier to use!

For Agilent, the basis is 22% of your HP basis, see

(you then adjust when you figure basis for VRGY) For VRGY the basis is .0578 of the Agilent shares basis, see (this link will offer to download a PDF, if this alarms you, go to enter vrgy to see the link) Google is your friend.

JOE JoeTaxpayer.com

Assuming that the first quoted price for each spun off stock is your basis, here is how to find them:

Go to Yahoo Finance

Enter thestocks' symbols > For each stock, click on Historical Pricesin the left column > Adjust the End Date to the dayfollowing the Start Date > Click Get Prices and scroll down. Using this method, I got $14.38 for Verigy on 6/14/06 and $38.05 for Aligent on 11/19/99. Please note that I do not guarantee that this method is the correct one. Perhaps the pros will comment. (I am certain that they will should I be wrong.) And PLEASE, PLEASE STOP PULLING YOUR HAIR OUT.

Bill

I assume you mean that your HPW stock spun off 'A' before you sold it, otherwise you would not have had any parent stock to spin off from. In which case you should have figured the cost basis of the new 'A' stock _at that time_ and REDUCED the cost basis of the parent HPW stock to reflect that reduction in value. At the time of the spin off the total value of both stocks and your total basis in both stocks would have been the same as before the spinoff. If you _didn't_ do that, and I assume that you did not, because you are asking the question now, then what did you use for the cost basis of the HPW stock when you sold it? If you didn't reduce it and you used your original basis, then your current basis for any spinoffs from that stock is zero (you already used your total basis even though you should not have).

Because you sold the parent stock at a loss and I assume that you used it's original basis, then you took a larger loss than you were entitled to, resulting in lower taxes for you at the time. If this was within the last three years you may still be able to amend that return to correct the error -- you might come out ahead overall. If this were years ago, I think I would just let sleeping dogs lay, and eat any additional tax this would cost now.

Most companies after a spinoff, send work sheets to compute the new cost basis for the existing shares and the new shares along with the new stock notice. Most companies also have the worksheets posted on their investor section of their web sites. If my above assumptions are incorrect, then please provide more information.

--

-Ernie-

I believe that you will find the answers here:

And here: And PLEASE, PLEASE stop pulling your hair out.

Bill

Please ignore the above post. It is superseded by my other one on this subject.

. . .

When A was split off, you needed to allocate the cost basis of HWP to A and HPQ, proportional to their market values immediately after the split. The same would occur when VRGY was split off. When you sold the HPQ, what cost basis did you use? If it was the full cost of the HWP, that was wrong. Seth

Bill, no offense, but this is exactly the wrong way to do it. While the relative prices may factor into the ratio finally determined, it's not math that one can just do at home. Every spinoff has a statement from the company which will spell out the basis ratios. I posted both of those links, and the OP posted links as well. A stock trading at $50 can spin out a stock at $25, but the ratio may not be the expected 50%. It depends on the number of shares spun to the shareholders, shares that were sold at IPO of the spinoff, and assignment of debt or cash reserves. Had the OP posted her shares and info in her original email, I'm sure many (including me) would have run the numbers. In the end, it's straight math (using the published numbers), not very complicated. JOE

[lots of good work deleted for brevity]

Not an expert, and I didn't check your math or references, but it all looks good to me. I see that you did indeed, do the math and reduce the cost basis in the original HPQ stock before you sold it in 2001 so that is not a problem. All that is left to do now is figure the basis for the other stocks the same way. You are on the right track.

Just be thankful that you didn't buy AT&T stock in 1962 like I did :) I have lost track of the number of companies and stocks that have spun off, merged, re-spun off, and reemerged and finally becoming the NEW AT&T not to be confused with the OLD AT&T. I defy anyone to figure the cost basis of the stock in the new AT&T, keeping in mind that all dividends from all the spinoffs were reinvested for years.

--

-Ernie-

You are of course correct, while my post was not. After composing it, I realized my error and found the correct method via Google. There was a problem with the communications between here and MTM HQ and the first message would not SEND. Later, when I sent the second post, the first one somehow went along with it. My apologies to all.

Bill

I received the help I needed from another newsgroup.

With their and your help, I belatedly see the many errors in my tax thinking. I repeat the essential tax calculations below (fixing all my real errors) so someone else can easily follow the proper methodology, even if they were to own a different stock than I. Note that four significant figures are often employed (sometimes six when necessary to avoid mismatches) to minimize rounding confusion when dropping back to two decimal places. Hopefully this helps others avoid pulling their hair out for taxes! A. In 1998, you pay $5,475.40 for 100 shares of Hewlett Packard (HWP). All calculations below are unavoidable tax consequences of that act.

B. On June 2, 2000, shareholders received 0.3814 shares of Agilent (A) for every share of HWP, resulting in: 100 shares HWP x 0.3814 = 38.1400 shares of Agilent.

You must obtain the HWP to A spinoff calculations from HWP:

You must perform the following seven (7) calculations.

1. You must recalculate the HWP cost basis: The new HWP cost basis was 78% of the original HWP cost basis. New cost basis for HWP = 78% of the original cost basis for HWP New cost basis for HWP = 78/100 x ,475.40 New cost basis for HWP = 0.78 x ,475.40 New cost basis for HWP = ,270.8120
2. You must calculate the aggregate Agilent cost basis: The aggregatge Acost basis was 22% of the original HWP cost basis. Aggregate Agilent cost basis = 22/100 x ,475.40 Aggregate Agilent cost basis = 0.22 x ,475.40 Aggregate Agilent cost basis = ,204.5880

Proof is the new cost basis should always equal the old cost basis: Old cost basis HWP = New HWP cost basis + aggregate A cost basis Old cost basis HWP = $4,270.8120 + $1,204.5880 Old cost basis HWP = $5,475.40 (check)

1. You must calculate the aggregate Agilent cost basis per share: Aggregate A cost basis per share = A cost basis/number of shares Aggregate A cost basis per share = ,204.588/38.14 shares Aggregate A cost basis per share = .5833/share
2. You must calculate the Agilent fractional share cost basis: Agilent fractional share cost basis = 0.14 share x .5833/share Agilent fractional share cost basis = .4217
3. You must calculate the Agilent fractional share sale basis: Agilent was trading at .75 on June 2, 2000 when the Agilent fractional share was sold beyond your control. Agilent fractional share sale basis = .75/share x 0.14 shares Agilent fractional share sale basis = .4450
4. You must calculate the Agilent fractional long term capital gain: Fractional share LTCG = fractional sale basis - fractional cost basis Fractional share LTCG = .4450 - .4217 Fractional share LTCG = .0233

LTCG taxes must be paid on the $7.03 in tax year 2000.

1. You must calculate the Agilent whole share cost basis: Whole share A cost basis = Aggregate cost basis - fractional cost basis Whole share A cost basis = ,204.5880 - .4217 Whole share A cost basis = ,200.1663

Proof is 38 shares x $31.5833/share = $1,200.1654 (check) C. HWP split 2:1 on October 27, 2000 resulting in 200 shares of HPQ. Note the symbol changed from HWP to HPQ at this point in time.

You must obtain the HWP to HPQ split & symbol change calculations:

D. Selling 200 shares of HPQ in 2001 for $5,307.87 triggered an event: LTCG for HPQ = sale basis of HPQ - cost basis of HPQ LTCG for HPQ = $5,307.87 - $4,270.81 LTCG for HPQ = $1,037.06

LTCG taxes must be paid on the $1,037.06 in tax year 2001.

E. On October 31, 2006, shareholders received 0.122435 shares of Verigy (VRGY) for every share of Agilent, resulting in: 38 shares A x 0.122435 = 4.6530 shares of VRGY You must obtain the Agilent to Verigy spinoff calculations:

You must perform the following seven (7) calculations.

1. You must recalculate a new Agilent cost basis: The new A cost basis was 94.22% of the previous A cost basis. New cost basis for Agilent = 94.22/100 x ,200.1663 New cost basis for Agilent = 0.9422 x ,200.1663 New cost basis for Agilent = ,130.7967
2. You must calculate the aggregate Verigy cost basis: The aggregate VRGY cost basis was 5.78% of the previous A cost basis. Aggregate Verigy cost basis = 5.78/100 x ,200.1663 Aggregate Verigy cost basis = 0.0578 x ,200.1663 Aggregate Verigy cost basis = .3696

Proof is the new cost basis should always equal the old cost basis: Old Agilent cost basis = New A cost basis + aggregate V cost basis Old Agilent cost basis = $1,130.7967 + $69.3696 Old Agilent cost basis = $1,200.1663 (check)

1. You must calculate the aggregate Verigy cost basis per share: Aggregate VRGY cost basis per share = VRGY cost basis/number of shares Aggregate VRGY cost basis per share = .3696/4.6530 shares Aggregate VRGY cost basis per share = .9086/share
2. You must calculate the Verigy fractional share cost basis: Verigy fractional share cost basis = 0.6530 share x .9086/share Verigy fractional share cost basis = .7353
3. You must calculate the Verigy fractional share sale basis: Verigy was trading at .80/share on October 31, 2006 when the Verigy fractional share was sold beyond your control. Verigy fractional share sale basis = .80/share x 0.6530 shares Verigy fractional share sale basis = .9704
4. You must calculate the Verigy fractional long term capital gain: Fractional share LTCG = fractional sale basis - fractional cost basis Fractional share LTCG = .9704 - .7353 Fractional share LTCG = .2351

LTCG taxes must be paid on the $1.2351 in tax year 2006

1. You must calculate the Verigy whole share cost basis: Whole share VRGY basis = Aggregate basis - fractional basis Whole share VRGY cost basis = .3696 - .7353 Whole share VRGY cost basis = .6343

Proof is 4 shares x $14.9086/share = $59.6344 (check)

F. To exit from this tax calculation misery, you sell all 38 shares of Agilent in December of 2006 for $1,222.39

You must calculate the long term capital gain on Agilent: LTCG for Agilent = sale basis of A - cost basis of A LTCG for Agilent = $1,222.39 - $1,130.7967 LTCG for Agilent = $91.5933

LTCG taxes must be paid on the $91.59 in tax year 2006.

G. To end the pain once and for all, you sell the 4 piddly shares of Verigy in December 2006 for a total of $56.48.

You must calculate the long term capital loss on Verigy: LTCL for Verigy = sale basis of VRGY - cost basis of VRGY LTCL for Verigy = $56.48 - 59.6343 LTCL for Verigy = (-3.1543)

Long-term capital losses of -$3.15 exist in tax year 2006.

=================================================Cash Received:

06/02/2000 = $11.45 (Cash for fractional share of A) 07/01/2001 = 5,307.87 (Sale of 200 HPQ) 10/31/2006 = 10.97 (Cash for fractional share of VRGY) 12/04/2006 = 56.48 (Sale of 4 VRGY) 12/07/2006 = 1,222.39 (Sale of 38 A)

---------------------- TOTAL RECD = 6,609.16 LESS COST = 5,475.40 NET GAIN $ 1,133.76

Reported as: TAX YEAR 2000 = 7.03 (Gain on fractional share of A) TAX YEAR 2001 = 1,037.06 (Gain on sale of HPQ) TAX YEAR 2006 = 91.59 (Gain on sale of Agilent) TAX YEAR 2006 = 3.15 (Loss on sale of Verigy)

---------------------- Total $ 1,132.53 (Gain over 8 years)

Gain = Principal * Rate * Time Rate = Gain/Principal/Time Rate = $1,132.53/$5,475.40/8 years Rate = 0.0259 (before taxes) Rate = 0.0259 x 80% (after taxes)

ANALYSIS: Hewlett Packard was NOT a very good investment! Gain ~ 3% before taxes The gain wasn't even worth the tax calculation. :( Gain ~ 2% after taxes =================================================

I was told via email that this was the WRONG calculation to use for the gain and for the reports to the IRS so I post this for the others who follow my calculation example for THEIR stock to benefit. Use the correct calculation for YOUR gain - do not use my calculation above. I don't know what forumula to use, but the emails to me said that I was totally wrong in posting this formula for the total gain so please ignore it. I do think the tax calculation part was correct though but it would be nice if someone confirms that before others use it as a real-life example for their personal share-split tax calculations. Sue