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?
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.
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.