Short-term, long-term, spinoff

  • Thread starter Michael Stemper
  • Start date

M

Michael Stemper

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
$25.00 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,
 
Last edited by a moderator:
Ad

Advertisements

A

AK47

Michael Stemper said:
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?
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.
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?
Yes.

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?
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.
4. Assuming that I do have to pay taxes on the roughly
$25.00 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?
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.
 
Last edited by a moderator:
J

joetaxpayer

Michael said:
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
$25.00 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?
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
 
Last edited by a moderator:
S

Seth Breidbart

Michael Stemper said:
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?
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).
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?
You should have received a statement from the company to
that effect.
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?
Yes: capital gains from sale of stock (less than one share
of the spinoff, how much difference can that make?)
4. Assuming that I do have to pay taxes on the roughly
$25.00 that I got from the unwanted sale of my fractional
share, what are the short-term/long-term restrictions?
Measure from the date you bought the original stock to the
date of the spinoff.
Can I take my basis for the new company out of the oldest
shares that I have in the parent firm?
I think they have to come ratably out of all shares.
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?
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
 
Last edited by a moderator:
S

Shyster1040

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.
 
Last edited by a moderator:
Ad

Advertisements

S

Seth Breidbart

Shyster1040 said:
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.
That's correct.
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.
I disagree. Consider:

1. Buy 200 shares at 5

2. A year later, buy 50 shares at 6

3. 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
10. (If you think that's illogical, consider buying 50 and
later 200.)
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.
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
 
Last edited by a moderator:
Ad

Advertisements


Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top