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 prorata 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 when you exchange all your shares, 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.)
It gets more complicated when only a portion of the shares you submitted are accepted for tax-free exchange. In this case, you are supposed to apportion your original cost basis between the shares you retained and the new shares you received based on relative market values. The acquisition date carries over and no gain or loss is recognized (except for cash in lieu of fractional shares), but the basis per share in your original holdings will change.
The chart to the right will help you understand the differences between the various corporate reorganization actions.
Type of Corporate Action
Keep Parent Stock?
Parent Stock Still in Existence?
Recent examples of demergers or split-off transactions include: Coach Inc from Sara Lee Chipotle from McDonald's Domtar from Weyerhaeuser Folgers from Procter & Gamble Liberty Media Corp from Liberty Media Group
Mead Johnson Nutrition Co from Bristol-Myers Squibb Post Cereals (Ralcorp) from Kraft Foods
Reinsurance Group of America from MetLife
Zoetis from Pfizer
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 you exchange $9.00 in market value of the original stock, you 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 and want to avoid the cost basis recalculation headache.
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email our webmaster @ costbasis.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.