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Calculating the cost of spinoff stock

George SaenzDear Tax Talk,
In December 2004 a company in which I own stock did a corporate spinoff. I know the cost basis of the original stock, but how do I calculate the cost basis of the original stock and the new stock after the spinoff? What do I do about the "cash in lieu of stock" I received for a partial share of the new company? What is the date of the ownership of the new stock? And what is the purchase date for the partial share? Is the "cash in lieu of" considered income or a capital gain?
-- Jacqueline

Dear Jacqueline,
The spin you're missing is that the company needs to inform you on how to allocate your cost basis to the spun-off shares.

A spinoff is the separation of two or more business units of a company. For example, Motorola spun off Freescale Semiconductor, Inc. to its shareholders on Dec. 2, 2004. Before, stockholders of Motorola indirectly owned Freescale as it was owned by Motorola; after the spinoff, they have a direct ownership interest in Freescale and continue to own Motorola.

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The value of the Motorola stock after the spinoff should have decreased, as it no longer owned Freescale. Presumably, the decrease in value of your Motorola stock was offset by your gain in Freescale stock. It's like a reverse merger or an unmerging of two companies.

Most spinoffs are accomplished with no tax consequences to the shareholders. For example, in the Motorola spinoff, if you owned 100 shares of common stock you would have received 11.0415 shares of Freescale. Since fractional shares were not issued you would have received cash equal to the 0.0415 share of Freescale. On the day before the spinoff, Motorola closed at $19.66 per share and it opened the next day at $18.18. Therefore you had $1,966 in stock in the combined companies and $1,818 in Motorola stock and the difference of $148 should have been represented by the 11.0415 shares of Freescale, or around $13.40 per share based on the difference. But on Dec. 3, Freescale actually opened at $18.20 a share for a value of $200. You actually gained $52 from the spinoff, but this isn't taxed.

In my experience, the company usually informs you on how to allocate your cost basis in the original stock to the spun off shares. It's usually done based on the relative values. For example, in the case of Motorola you could take the combined opening values of $2,018 as your denominator. $200 divided by $2,018 multiplied by your original cost in Motorola (let's say $1,000) would be allocated to Freescale with the remainder allocated to Motorola. Rounding, this results in a $99 allocation to the 11.0415 shares, or around $8.96 a share, of which $0.37 would be allocated to the fractional share you received in cash for computing capital gain or loss.

Your holding period for purposes of long-term gain dates to the original acquisition of your Motorola stock. That is, if you acquired your Motorola stock on Jan. 5, 2002, that would be the date of acquisition for the Freescale stock, including the fractional share. If you continue to own both stocks after the spinoff, there is nothing you need to show on your return except for the fractional share sale.

-- Posted: Feb. 1, 2005
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