Spinoffs are corporate actions in which the stock of a corporate subsidiary is distributed to all existing shareholders of the parent company on a pro-rata basis.
It is usually a tax-free transaction where you incur no gain or loss from the spinoff (except for the liquidation of fractional shares.)
For information on recent spinoffs, follow the links (stock symbols shown in parentheses):
Altria (MO) spinoff of Philip Morris International (PMI) Cadbury Schweppes (CDY) spinoff of Dr Pepper Snapple Group (DPS) Fidelity National Information (FIS) spinoff of Lender Processing Services (LPS) Marshall & Ilsley (MI) spinoff of Metavante (MV) Morgan Stanley (MS) spinoff of Discover Financial Services (DFS) Potlatch (PCH) spinoff of Clearwater Paper (CWP) Telefonos de Mexico (Telmex) (TMX) spinoff of Telmex Internacional ADR (TII) Verizon (VZ) spinoff of Fairpoint Communications (FRP)
Click on the picture below to access our handy spinoff calculator. We can help you compute your new cost basis and gain or loss on cash received in lieu of fractional shares. Just select the name of your spinoff from the drop-down menu or insert your own data.
Spinoff Calculator
TAX-FREE SPINOFFS:
After a spinoff, you own stock in two different companies. You therefore have to allocate the cost basis you had in the original parent company to the two stocks you now own--the parent and the new spinoff.
To illustrate, assume the following:
You owned 100 shares of XYZ Corp which you purchased on 7/1/2004 at $50 per share for a total cost of $5,000.00. On 7/1/2006, XYZ Corp spun off shares their subsidiary ABC Company to all of their shareholders at a rate of 1 share of ABC for every share of XYZ. You received 100 shares of ABC Company. XYZ announce on their website under the "Investor Relations" tab that the allocation of cost basis to be assigned to the shares of ABC was 7% of your cost basis for XYZ. This was determined by the relative market values of the trading prices for ABC and XYZ after the shares started trading independently.
Your cost basis for 100 shares of ABC is therefore 7% of $5,000.00, or $350.00 with an acquisition date for holding period purposes of 7/1/2004 (not the date of the actual spinoff.)
Your adjusted cost basis for 100 shares of XYZ becomes the remainder, $4,650.00, after deducting the cost allocation for ABC from your original purchase price for XZY. Your acquisition date remains as 7/1/2004.
TAXABLE SPINOFFS:
Sometimes a spinoff is a taxable transaction where taxable income is reported on your Form 1099. In this case, your cost basis in the spinoff shares is NOT an allocation of a portion of your cost basis in the parent company. Instead, your cost basis is the amount of taxable income that was reported to you and your holding period (acquisition date) starts on the day you received the spinoff shares.
How do you know which kind of spinoff you received? You can usually find out by reading the tax information letter sent to all shareholders, or by going to the website of the company and clicking on "Investor Relations." You will also know it was a taxable spinoff if you see dividend income reported on your year-end Form 1099 as of the date of the spinoff. Be careful to note that sales proceeds reported for cash-in-lieu of fractional shares does not mean that it was a taxable spinoff.
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Information provided is intended solely for U.S. individual cash-basis taxpayers and is believed to be accurate for most cases. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please e-mail webmaster @ costbasis.com or write to us at P O Box 11022, Chicago IL 60611 with your comments.
