In some reorganizations corporations undergo stock split-ups. This is different from a split-off because in a split-up the stock of the corporation you previously owned no longer exists--it is split into two (or more) new companies. The original company is liquidated when the two new companies are issued. In comparison, in a split-off the previous corporation continues in existence.
The term split-up can be very confusing because the media often uses the term loosely, referring to split-ups when they mean stock splits, or spinoffs when they mean split-ups or split-offs.
The important thing that distinguishes these different forms of corporate reorganization is what happened to your ownership of the parent company stock. Did you still keep it (spinoff), did you exchange it but the parent company stock still exists (split-off), or did the parent company cease to exist (split-up.)
For cost basis purposes, split-ups are usually accounted for by one of two methods: 1. Carryover basis, or 2. Liquidation.
Carryover Basis: The usual cost basis accounting for split-ups is that you carry over the cost basis you had in the original "parent" stock to each of the new companies you received in the split-up in proportion to their relative market values at the date of the split-up. Your holding period in the new companies starts on the day you acquired the original parent stock.
You always need to check the section of the SEC filing for the split-up entitled "Material U.S. Income Tax Consequences" to verify that this treatment applies to your split-up.
Click on the image below to access our Split-Up Calculator
Split-Up Calculator
Liquidation: If the specific IRS requirements for carryover basis treatment are not met under the terms of the reorganization transaction, the issuance of the two split-up stocks will be treated as a liquidation. This means that the fair market value of the two new stocks you received will be reported on your Form 1099-B as sales proceeds (even though you received no cash.) Your cost basis in the original stock is then deducted to arrive at your taxable capital gain. Your cost basis in the two new stocks then becomes the fair market value at the date of issuance (since that is the amount on which you were taxed), and your holding period for the new stocks begins at the date of issuance.
The specific IRS requirements for carryover basis versus liquidation treatment are determined at the corporate level and depend on factors such as: 1. Whether an active trade or business was conducted by each of the subsidiary companies for the past five years. 2. Whether the transaction is being used to distribute earnings and profits of the previous corporation. (The IRS wants profit distributions to be reported as dividends instead.) 3. Whether an active business is being operated in each of the new companies. 4. Whether the previous corporation owned 80% or more of each of the subsidiary companies and distributed all the stock it owned.
