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Posted by R. C. White on April 4, 2007, 11:50 pm
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Hi, AA.
Thanks for that URL (http://www.altria.com/investors/02_20_02_example.asp).
> At the end of the
> transaction shouldn't Altria be 65.90 and Kraft be 31.66?
No. Those are the Fair Market Values of those shares, NOT their adjusted
bases in your hands. Before the spin-off, you had a "paper gain" in Altria;
it had cost you $77 and was worth $87.81. After the spinoff, your total
adjusted basis should not have changed; it should still be $77 times the
number of Altria shares (since you still have the same number of Altria
shares, too).
There are several ways to compute your new basis outside of Quicken, using
good old pencil and paper. One way is to calculate that Altria is worth
$65.90/$87.81 = 75% (rounded) of the total value of 1 Altria and .692024
Kraft, so its new basis should be 75% of your original $77 basis, or $57.75
per share. That fractional share of Kraft would be worth the other 25%, or
$19.25. The total new basis is $57.75 + $19.25 = $77.00, the same as your
original basis. To get the basis of a full share of Kraft, divide $19.25 by
the .692024 fraction = $27.82 (rounded).
If you had 100 shares of Altria at a total basis of $7,700.00, you should
now have:
100 shares of Altria at a basis of $57.75 per share = $5,775.00, plus
69.2024 shares of Kraft at a basis of $27.82 per share = $1,925.00
(rounded),
for a total adjusted basis of $7,700.00
You would immediately sell the .2024 fractional share of Kraft at $31.66 per
share and receive a check for $6.41. Deduct your basis for that fractional
share (.2024 * $27.82 = $5.63) and you have a $0.78 capital gain. This will
leave you with 69 shares of Kraft with a basis of $27.82 per share. Your
total basis for Altria and Kraft will now be $7,700 - $5.63 = $7,694.37.
When I poked these numbers (65.90 and 31.66) into Quicken 2007 Basic, I got
adjusted bases of $5,778.76 for 100 Altria and $1,921.24 for 69.2024 Kraft.
On the Transactions tab, there is a Return of Capital for Altria and a
Bought for Kraft, each in the amount of $1,921.24. On the Summary or
Portfolio page, the total bases are shown, but not the per-share basis.
I don't know why you got different bases. Try it again and see what you
get.
RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(Currently running Vista Ultimate x64)
> RC,
>
> You explained that well. And I beleive you are current in all your
> statement. I understand how to compute this on paper but i'm having
> troubling inputing this into Quicken.
>
> Can you please tell me what I'm doing wrong??? I'm entering the
> following information:
>
> New shares issued = 0.692024 per old share
>
> Cost per old share = 65.90 post spinoff
>
> Cost per new share = 31.66 post spinoff
>
> It seems like I am getting the correct new shares number for Kraft.
> The problem is the new cost basis of both securities. Altria is coming
> up with 77 (which is was my cost basis pre-spin off before
> commissions) and Kraft is coming up with 27.95. At the end of the
> transaction shouldn't Altria be 65.90 and Kraft be 31.66?
> What am I missing?
>
> Altria post an example on how to compute the values.
> http://www.altria.com/investors/02_20_02_example.asp
>
> Thanks for any help.
> AA
>
>> Hi, GB.
>>
>> Step 1, of course, is to understand what happened in the real world.
>> News
>> reports usually tell us, but often leave out some important details. The
>> best place to get the information is usually from the parent company.
>> Nowadays, we can just go to their website and click on something like
>> Investor Relations.
>>
>> In this case, the parent is NOT Philip Morris, but PM's parent, Altria.
>> A
>> little searching found:
>> Kraft Spin-Off Investor
>> Informationhttp://www.altria.com/investors/02_20_00_spinoffinvinfo.asp
>>
>> The link there took me to the page we really want:
>> Kraft Spin-Off Investor
>> Informationhttp://kraft.com/investors/kraft_spin_off.html
>>
>> But the spin-off did not happen in 2006. To quote:: "The distribution
>> of
>> Kraft's outstanding shares owned by Altria was made on March 30, 2007, to
>> Altria shareholders of record as of 5:00 p.m. Eastern Time on March 16,
>> 2007." Then the Kraft page refers us back to the Altria page for
>> details,
>> where we see, "Altria will distribute 0.692024 of a share of Kraft for
>> every
>> share of Altria common stock outstanding as of the Record Date,..."
>>
>> Step 2 is to record what actually happened in Step 1.
>>
>> In Quicken 2007, click Enter Transaction and choose Corporate Securities
>> Spin-Off. The transaction date is 3/30/07. Security name is Altria
>> Group,
>> Inc.. The new company is Kraft, Inc. New shares issued is 0.692024 (of
>> Kraft) per old share (of Altria). And leave blank the "taxable spinoff"
>> box; Altria says it qualifies as tax-free. You may want to make some
>> notations in the Memo box.
>>
>> But that is as far as we can go until we get two more bits of
>> information:
>> the Fair Market Values of Altria and Kraft immediately AFTER the
>> spin-off.
>> Quicken asks for the "Cost" of the old and new shares, but that is not
>> correct. When we know the FMVs of the shares, Quicken can then calculate
>> the new bases (cost) of the old and new shares, based on the ratio of
>> those
>> values, applied to your adjusted basis in Altria. Quicken will adjust
>> the
>> basis for all the lots of Altria that you owned, and will record the
>> basis
>> of matching lots of Kraft, and will show the acquisition dates for each
>> lot
>> as of the dates you acquired the matching lots of Altria. (This will
>> have
>> the unfortunate effect of showing that you owned Kraft shares before
>> 3/30/07, which is wrong, of course; we haven't figured out a good way to
>> fix
>> this, and neither has Intuit, apparently.)
>>
>> The actual spin-off date was just a couple of days ago. Within a very
>> few
>> days, Altria should determine and publish their opinion as to the FMVs of
>> Altria and Kraft for shareholders to use in the calculation. (FMV is a
>> matter of opinion and you are free to argue for different numbers, but it
>> rarely is worth the trouble.)
>>
>> You probably will be entitled to a fractional share of Kraft and will
>> receive cash in lieu of that fraction. Immediately after recording the
>> spin-off, you should record the sale of this fraction for the amount of
>> the
>> check you will receive. Use the per-share basis that Quicken has just
>> calculated and your Altria acquisition date; Quicken should handle this
>> for
>> you automatically.
>>
>> For further information, watch the Altria and Kraft web pages.
>>
>> I've been retired for over a dozen years and tax rules change daily, GB.
>> Be
>> sure to check with your own CPA to be sure that my understanding is still
>> correct.
>>
>> RC
>>
>>
>>
>>
>>
>> > Hello
>>
>> > Why do Quicken software "Engineers" make a simple thing, so damm
>> > hard????
>>
>> > I am trying to do a corporate spin off of Kraft from Philip Morris
>> > [MO],
>> > the spin off option in the drop down menu under action for a new
>> > transaction [Q2006] does not work correctly [the number of shares and
>> > price are not correct]
>>
>> > Maybe I am entering the wrong information? What numbers are they asking
>> > for in the boxes under the "spin off" action?
>>
>> > What I ended up doing is creating a "buy shares" option under action,
>> > this makes the numbers come out correct.
>>
>> > Thanks everyone
>> > GB
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