Short-term, long-term, spinoff

I have held stock in a company for several years, and have augmented my position by participating in their Dividend Re-Investment Program (DRIP). Towards the end of 2006, they spun off another company, issuing one share of new company stock for every twenty shares of old company stock. This leads to all kinds of questions on my part.

  1. Since the spinoff was 1-for-20, I believe that my basis in the new company is 1/21 of my basis in the parent, and that my basis in the parent is 20/21 of its previous value. Is this correct?
  2. It is my understanding that the spin-off, in and of itself, is not a taxable event, any more than would be a stock split. Is this correct?
  3. Although the shares in the new company are book entry only, the decision was made that any fractional shares would be sold and the proceeds turned over to the shareholders. (Jerks!) Despite the answer to 2, am I right in thinking that this is a taxable event?
  4. Assuming that I do have to pay taxes on the roughly .00 that I got from the unwanted sale of my fractional share, what are the short-term/long-term restrictions? Can I take my basis for the new company out of the oldest shares that I have in the parent firm? This would be simple for a lot of reasons, as well as making this transaction strictly a long-term gain. Or, do I need to reduce the basis of each purchase in the parent by (1/21) and report thirty different bases in the fractional share, with some of them short-term and others long-term? Thank you,

-- Michael F. Stemper #include You can lead a horse to water, but you can't make him talk like Mr. Ed by rubbing peanut butter on his gums.

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Reply to
Michael Stemper
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Michael Stemper wrote in

No, you split your original basis in the parent in proportion to the market values of the parent and sub stock you hold when they begin to be traded independently.

Yes.

Yes, you have a basis in the fractional shares and a gain or loss based thereon, it would normally be quite small. Your holding period dates back to your original purchase of the parent's shares so it is probably long term.

This is a tough question, but we are not talking about much money. I would think that technically you would have to make a choice between average cost and specific identification.

Reply to
AK47

1) Nope. Let me offer an example. XYZ corp spins out TUV corp, one share of TUV for every share of XYZ. Do you take 50% of the basis for each stock? Hardly. We have no idea the relative value of each. Since you don't name the stock, noone here can answer you. Safe to say, the answer is spelled out in the notice you got of the spinoff and through the companies' web sights. 2) This is nearly always true, but not 100%. So again, the documents will help. 3) At least 1 for 20 is 5 for 100. How about 1 for 7? Who owns a multiple of 7? Anyone? Yes, the jerk money is taxed. Back to (1) to figure its basis. 4) The purchase date follows the original shares' date. I've not adjusted for new dates of reinvested Dividends on those shares. Nor have I let those purchases of the fractions interfere with wash sale rules, although I suppose an audit would uncover that I should have disallowed the loss on .5 shares out of the 200 I sold due to wash rules, and track that. JOE
Reply to
joetaxpayer

No, this is not correct. The correct basis is the ratio of the market values of the two holdings (you can use the first day's closing prices).

You should have received a statement from the company to that effect.

Yes: capital gains from sale of stock (less than one share of the spinoff, how much difference can that make?)

Measure from the date you bought the original stock to the date of the spinoff.

I think they have to come ratably out of all shares.

However, under FIFO, you can consider the fraction they sold to be based on your oldest holdings (provided you purchased at least enough shares then to cover the fraction). Seth

Reply to
Seth Breidbart
  1. No. Your basis in your old stock is allocated between the old stock and the new stock according to the relative fair market values on the date of the spin off. This applies not only to the shares you received, but the fractional shares you were deemed to receive that were then redeemed for cash - i.e., you have to allocate some of the basis to the fractional shares so you can determine how much gain you had upon receipt of the cash in lieu of the fractional shares. Keep in mind, you cannot aggregate the bases of your various lots of stock and allocate an average basis amount to each share of new and old. You will have to identify each lot of old stock and then allocate the basis of that lot among the old and the new that are attributable to that old lot according to relative FMV.
  2. You should have received a notice or letter from the company telling you whether or not the spin off was nontaxable. They generally are, but you need to know for sure (at least you need to know if the company intended the spin off to be nontaxable, and even better, if they got a private letter ruling from the IRS that ruled the spin off, if carried out as described in the letter, would be nontaxable).
  3. Yes, the cash that you received in lieu of fractional shares will be taxable even if the spin off itself was nontaxable.
  4. No. What you need to do is identify each of the separate lots of stock you have, and then determine what new shares, and what fractional shares, were distributed to you with respect to each lot. The basis of the old shares in each lot will be allocated among the old shares, new shares and fractional shares by FMV. The new shares and fractional shares also take the same holding period as the old shares to which they relate. If you have a new share, or a fractional share, that does not relate entirely to one lot of your old shares, then that share has to be split between two or more of the lots to which it does relate, and the basis and holding period of that share or fractional share will be split - i.e., if, e.g., a fractional share is allocated 40% to Lot 1 and 60% to Lot 2, that fractional share will have basis and a holding period for 60% of the fractional share that comes from Lot 1, and 40% from Lot 2. Yes, it can be a pain in the ass, so you would be best off setting up a spreadsheet to do the number-crunching for you. Once it's set up, the calculations should come out of the spreadsheet fairly easily.
Reply to
Shyster1040

That's correct.

I disagree. Consider:

  1. Buy 200 shares at 5

  1. A year later, buy 50 shares at 6

  2. Six months later, split off 1:20 so you get 12.5 shares of the new stock. The same day, you sell .5 shares of the new stock.

The basis for 10 shares of the new stock is based on the original purchase, and for 2.5 shares on the second purchase. Under FIFO, the .5 shares you sell came from the

  1. (If you think that's illogical, consider buying 50 and later 200.)

What if he did 25 purchases of 10 shares each? Then _all_ his new stock would be fractional shares, yet only .5 shares is sold. Seth

Reply to
Seth Breidbart

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