A split-off of stock occurs when a corporation decides to demerge part of its business to its shareholders. It is different from a spinoff where every shareholder receives a proportionate piece of the business. In a split-off, the parent corporation offers to all of its shareholders the opportunity to exchange shares in the parent for shares in the split-off company. This is usually a tax-free exchange. Unlike a spinoff, the shareholder no longer owns the shares in the parent company that they exchanged.
How do you account for a split-off? In the normal tax-free situation, you carry over your basis and holding period from the parent corporation shares you exchanged to the split-off shares you received. You recognize no gain or loss (except for cash received in lieu of fractional shares.)
A recent example of a split-off transaction is the demerger of Mead Johnson Nutrition Co from Bristol-Myers Squibb. The final exchange ratio will be determined on December 11, 2009.
Click on the image below to access our free Split-Off Calculator
Some other recent split-off transactions include: Chipotle from McDonald's Folgers from Procter & Gamble Post Cereals from Kraft Foods Reinsurance Group of America from MetLife
The new cost basis and gain/loss on cash in lieu of fractional shares can be calculated using our split-off calculator by clicking on the image above.
The exchange ratio is determined based on the relative market values of the original stock and the split-off stock immediately preceding the transaction. Corporations often incentivize shareholders to exchange shares for split-off stock by offering a discount (say 10%.) For example. if they exchange $9.00 in market value of the original stock, they will receive $10.00 in market value of the split-off stock.
Shareholders who subscribe to split-off offers often end up exchanging pro-rated shares if the offer is heavily subscribed. When the split-off company is an attractive investment, many more shareholders will agree to exchange than the number of shares available, so the original stock is pro-rated and only a portion is accepted for the exchange offer. Prorations on the order of 7% have been common in the recent past. For example, with the McDonalds split-off of Chipotle, if you submitted 100 shares of your McDonalds, thinking you would get 100 shares of Chipotle, you actually ended up getting only 7 shares. Many investors dislike holding small odd lots in their investment portfolios.
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.