Spinoffs and Mergers - cost basis allocations and tax considerations
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Spinoffs and Mergers - cost basis allocations and tax considerations Corporate mergers and
spin-offs are the source of many questions
from individuals and investment clubs. These
questions usually focus on the calculation or allocation of cost basis and the
determination of the holding period related to the sale of a security that was
obtained as the result of a merger or a spin-off.
First, let's address the issue of the
holding period as it relates to most spin-offs and
mergers. Typically for tax purposes, the holding period of any
block of a security that you have acquired as a result of a merger or spin-off
starts on the same date as your original block of stock. IRS
Publication 550 states that "the holding period for new stock you received as a
non taxable stock dividend begins on the same day as the holding period of the
old stock. This rule also applies to stock acquired in a
spin-off,..."
Generally, a merger
results in the receipt of shares in an acquiring company in
exchange for the shares that you held in the company being
acquired. The cost basis of these new shares must be allocated block
for block to the new company shares. For example, let's say you
hold 2 blocks of XYZ Corp, one of 100 shares and a second of 200 shares, each
block with cost basis of $1000 and $2400 respectively. XYZ
Corp. merges with another company at a 3 shares to one ratio, you now allocate
the original $1000 cost basis of the first 100 share block over the new 300
shares and the original $2400 cost basis of the second 200 shares over the new
600 shares. Using bivio accounting you will discover
that all of these detailed block by block calculations are done for you
automatically. All you need to do is enter the share ratio and any
cash in lieu of fractional shares, if any resulted from the merger
transaction.
Spin-offs are
generally treated like a stock dividend whereby you receive stock in a new
company while still holding shares in the old company. In this case, on a
block by block basis, IRS Pub 550 states that "you must divide the adjusted
basis of your old stock between the old and the new stock in the ratio of the
fair market value of each lot of stock to the total fair market value of both
lots on the date of the distribution of the new stock". It sounds complex,
but it really isn't. In most cases, the old company and/or its spin-off
company will provide you with the result of this calculation in the form of a
percentage that you should use to allocate your original cost basis between the
two companies. This information is also likely to be found under the
Investor Relations area of each companies web site shortly after the
spin-off has been completed.
bivio takes the drudgery out of doing these
calculations and manually adjusting the cost basis of each block of
stock. Providing bivio with the percentage or remaining basis
allocated to the old company, as often detailed in company provided
documentation or on their web sites, is all that is required to do this cost
basis allocation. If the company doesn't provide you with this
documentation, bivio will calculate this allocation ratio for you using the
supplementary calculator, or you can do it manually with the following
formula.
(# of post spin-off shares of parent x post
spin-off price of parent) divided by ((# of post
spin-off shares of parent x post spin-off price of parent) + (# of post spin-off
shares of spin-off x post spin-off price of spin-off)) resulting in the
percentage of your original cost basis that should remain allocated to your
original shares.
The balance of the original cost basis that is not
allocated to your original shares will then be allocated to your newly received
spin-off company shares. Note: Be sure to include the number of
any fractional shares resulting from the spin-off when you do this calculations
even if you received cash in lieu of those fractional shares.
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