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 (but not always) a tax-free transaction where you incur no taxable income, gain or loss from the spinoff (except for the liquidation of fractional shares.) You can verify the type of spinoff you received by reading the section of the proxy statement called "Material U.S. Federal Income Tax Consequences" at the SEC website.
AOL Corp (AOL) from Time Warner (TWX) Philip Morris Intl (PMI) from Altria (MO) Dr PepperSnapple Group (DPS) from Cadbury Schweppes (CDY) LenderProcessing Services (LPS) from Fidelity National Information (FIS) Metavante (MV) from Marshall & Ilsley (MI) Discover Financial Services (DFS) from Morgan Stanley (MS) Clearwater Paper (CWP) from Potlatch (PCH) TelmexInternacional ADR (TII) from Telefonos de Mexico (Telmex) (TMX) Fairpoint Communications (FRP) from Verizon (VZ) Frontier Comunications (FTR) simultaneous spinoff/merger from Verizon (VZ)
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.
"Computers are useless. They can only give you answers."
-- Pablo Picasso
After a spinoff, you own stock in two different companies. If it is a tax-free spinoff (also called a Section 368 reorganization), you 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.
You can calculate the percentages yourself if the company does not publish the spinoff allocation data. You can also audit the percentages that the company is reporting. You just need to know the spinoff distribution ratio and the stock market prices for the first day that the parent and spinoff stocks trade separately (the day after the distribution.) You can look up the trading ranges for that day using historical stock price resources such as BIG CHARTS. (Hint: When you use the historical stock price function at Big Charts, if the stock is no longer actively trading under the stock symbol, you can try using the CUSIP number. If that does not work, ask your broker to look up the CUSIP on Bloomberg, Interactive Data, or other databases available to broker/dealers. Large libraries also can provide this information from their archives of stock listings in daily newspapers. ) We have also had good luck finding historical prices at GOOGLE FINANCE.
Be careful to use the stock market trading prices for the day AFTER the spinoff. This is different from the first day of trading for the spinoff stock. Spinoff stocks usually start trading a few days or weeks before the actual distribution date on what is called a "when issued" basis. This gives the market a chance to look at the fundamentals of the stock and allows price discovery to occur in an orderly manner before the actual distribution date.
You are allowed by the IRS to use the opening price, the average price, the closing price, or the trade-volume-weighted average price on the first day of separate trading to compute the cost allocation factors. Most people use the closing price for simplicity. Where the company has provided guidance in the form of a tax information statement, we have tried to use the company's factors in the spinoff database.
The trade-volume-weighted average is where you take all the individual prices that the stock traded at that day and multiply it by the number of shares traded at that price. You then add up all the products and divide by the total share volume for the day to arrive at a trade-volume-weighted average.
Once you have the market prices, you simply use the following formulas to determine your allocation percentages:
Spinoff stock price per share x Spinoff distribution ratio = Spinoff equivalent market price Parent stock price per share + Spinoff equivalent market price = Combined market price Spinoff equivalent market price divided by Combined market price = Spinoff allocation % Parent stock price per share divided by Combined market price = Parent allocation % Spinoff allocation percent plus Parent allocation percent should always add to 100%
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.