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Subject Author Date
Multiple Corporate Spinoffs (Cendant) Walt Bilofsky 08-02-2006
Posted by aamato1 on August 9, 2006, 11:46 pm
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 Walt,

I just want to make sure I understand your problem with RC solution. Is
your only problem that the dates of the stocks that spin off get dated
back to the original purchase date of the first stock? Shouldn't it
be that way for capital gain purposes? For example, if I sell one on
the newly acquired stocks today, shouldn't I use the purchase date of
the original stock since it should be treated as long term capital
gain? Do you agree with that?

What other problems do you seem with RC solution?

Thanks for your help.

Anthony

Walt Bilofsky wrote:
> Thanks, RC. I followed your directions and they seem to have worked
> fine - almost.
>
> Apparently Quicken now correctly calculates the cost basis for
> multiple spinoffs. This wasn't the case four years ago.
>
> What I still don't understand is why Quicken puts the Buy and Return
> of Capital transactions back on the original purchase date of the
> parent company, in this case Cendant. This causes the spun-off shares
> to appear in the account long before they are actually there, messing
> up the historical records, net worth calculations, etc.
>
> The transaction can be corrected by changing the Buy to an Add Shares
> and put in the correct transaction and basis dates.
>
> The only problem is that the Return of Capital transaction puts cash
> into the account. The Buy took the cash back out, which the Add
> Shares does not. This can be fixed by putting the account in as the
> Transfer Account in the Return of Capital transaction - it magically
> disappears the cash.
>
> Anyone see any problem with this?


Posted by R. C. White on August 10, 2006, 12:31 am
Please log in for more thread options
 Hi, Walt.

> Apparently Quicken now correctly calculates the cost basis for
> multiple spinoffs. This wasn't the case four years ago.

Are you sure? Step by step, in Quicken, how do you handle multiple
simultaneous spinoffs from a single corporation?

> This causes the spun-off shares
> to appear in the account long before they are actually there, messing
> up the historical records, net worth calculations, etc.

Yes, sadly, this is what happens in Quicken. :>( It has always been this
way in Quicken, so far as I know. To correct the situation would take a
large investment of programming effort, I suspect. The program would have
to keep track of both the real-life dates and the "as if" dates that the tax
code prescribes. (And Quicken can't even keep track of Trade Dates and
Settlement Dates for stock purchases and sales.)

Many items that are required on the tax return cannot logically be entered
into Quicken. For example, the personal exemption is deducted from adjusted
gross income to arrive at taxable income, but there's no "correct" way to
get a Quicken income statement to show the correct "taxable income".
Another such item is the standard deduction. And how would you enter the
7.5% "floor" on medical expense deductions? We must resign ourselves to
using Quicken for its intended purposes and not try to get it to reflect all
the tax rules.

We all know that you did not own Realogy shares before 7/31/06. But, as
Anthony said, if you bought your Cendant shares in 2004 and you sell your
new Realogy shares this month, the gain (or loss) is treated as long-term
for income tax purposes. That is not "generally accepted accounting
principles"; that is Sec. 351 (if I recall the number correctly) of the
Internal Revenue Code. The IRC was written by Congress, not by
accountants - and not by Intuit programmers. It doesn't have to make sense;
it's the law!

I know this phony dating causes problems with the net worth calculations you
mention, plus ROI and other such investment ratios. That's part of the
reason that I long ago quit trying to understand and use Quicken's
calculations of such statistics.

Quicken started out to be a checkbook program. It still does that job very
well. Over the years, other functions have been added on: investments,
taxes, retirement planning and others. It does not handle all of those jobs
as well as it does the checkbook function.

> What I still don't understand is why Quicken puts the Buy and Return
> of Capital transactions back on the original purchase date of the
> parent company, in this case Cendant.

If you are showing a Buy, you are doing it wrong. If you show a Return of
Capital, then you are doing it wrong. A tax-free spinoff of corporate
securities does not involve either a return of capital or a buy. It
involves only a split of an existing investment into two (or more)
investments. You've bought nothing. None of your invested capital has been
returned to you (although you may have received cash for fractional shares
you are considered to have sold immediately after the spinoff). For
example, if you had held 100 Cendant shares before the spinoffs, you would
now hold 100 Cendant, plus 25 Realogy and 20 Wyndham - and no cash at all
would have been returned to you.

As always, check with your own CPA to confirm or correct my interpretation,
since I've been long retired and the rules may have changed.

RC
--
R. C. White, CPA [RC]
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(currently running Windows Mail 7 in Vista x64 Build 5472)

> Thanks, RC. I followed your directions and they seem to have worked
> fine - almost.
>
> Apparently Quicken now correctly calculates the cost basis for
> multiple spinoffs. This wasn't the case four years ago.
>
> What I still don't understand is why Quicken puts the Buy and Return
> of Capital transactions back on the original purchase date of the
> parent company, in this case Cendant. This causes the spun-off shares
> to appear in the account long before they are actually there, messing
> up the historical records, net worth calculations, etc.
>
> The transaction can be corrected by changing the Buy to an Add Shares
> and put in the correct transaction and basis dates.
>
> The only problem is that the Return of Capital transaction puts cash
> into the account. The Buy took the cash back out, which the Add
> Shares does not. This can be fixed by putting the account in as the
> Transfer Account in the Return of Capital transaction - it magically
> disappears the cash.
>
> Anyone see any problem with this?


Posted by Walt Bilofsky on August 10, 2006, 1:18 am
Please log in for more thread options

>Hi, Walt.
>
>> Apparently Quicken now correctly calculates the cost basis for
>> multiple spinoffs. This wasn't the case four years ago.
>
>Are you sure? Step by step, in Quicken, how do you handle multiple
>simultaneous spinoffs from a single corporation?
>
I was sure four years ago, but since it works in Q06 there's no point
in trying to reconstruct a fixed bug.

>> This causes the spun-off shares
>> to appear in the account long before they are actually there, messing
>> up the historical records, net worth calculations, etc.
>
>Yes, sadly, this is what happens in Quicken. :>( It has always been this
>way in Quicken, so far as I know. To correct the situation would take a
>large investment of programming effort, I suspect. The program would have
>to keep track of both the real-life dates and the "as if" dates that the tax
>code prescribes.

It already does that. Enter an Add Shares transaction and you will
see that there is a transaction date and a Date acquired (basis date).
This was added some years back when they fixed most of their basis
date bug. That took them five years to fix, because of the
programming effort you mention.

However, although they now have the tools to record a spinoff
correctly, for some reason they still don't.

>> What I still don't understand is why Quicken puts the Buy and Return
>> of Capital transactions back on the original purchase date of the
>> parent company, in this case Cendant.
>
>If you are showing a Buy, you are doing it wrong. If you show a Return of
>Capital, then you are doing it wrong.

Are you saying that's not how Quicken records a tax-free spinoff? (If
so, I disagree.) Or are you saying Quicken does it wrong? (I agree.)

There's no Spinoff transaction in a Quicken register, but the spinoff
can be correctly recorded by doing what I suggested in the above post
- entering the spinoff, and then changing Quicken's Buy and RtrnCap
transactions (found in the register on the basis date) to Add and
RtrnCapX transactions on the spinoff date. The labels might be wrong,
but I believe the effect is the same as if Quicken had a proper
spinoff transaction.

RtrnCapX to the same account is the same as a basis adjustment. This
is useful in other contexts. For example, when I do my taxes and have
to record Original Issue Discount (as on a zero coupon bond or
inflation-adjusted T-bill), I adjust the basis upward by entering a
Return of Capital for >> minus << the OID amount, with the same
account as the transfer account. This adjusts the basis without
changing the acount's cash balance.

Without adjusting the basis upward for OID, there is a risk of paying
tax twice, once on the OID and once as a capital gain when the
security is sold.

Posted by R. C. White on August 10, 2006, 11:08 am
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Hi, Walt.

First, I apologize for coming on too strong in my post yesterday. When I
took another look at the Dummy entries I made yesterday to record Cendant's
example, I saw that Quicken has CHANGED my entries! I know I did not use
RtrnCap or Buy, but that is how the entries are now shown in my Register.

I'm tempted to put the rest of my comments inline, but I want to change the
sequence so I'll just quote extensively and add comments...

> Enter an Add Shares transaction and you will
> see that there is a transaction date and a Date acquired (basis date).
> This was added some years back when they fixed most of their basis
> date bug.

I've seen some discussion of this here, but haven't experienced it myself.
Now, I when I click on one of the transactions that Q changed to "Bought"
and then click Edit, I still don't see a place to enter a second date in the
Buy window. But when I click on the "Enter transaction" drop-down box and
choose "Add - Shares Added", I see that Q changes the window. It leaves
most of the numbers unchanged, but adds a "Date acquired" box, with the
7/31/2006 date already filled in, and changes the "Transaction date" box to
8/8/2005, the date I used for my dummy purchase of C. It also adds a Memo
entry: "Non taxable spin-off on 7/31/2006".

In your experience, does this allow Q to produce both proper historical
statements and investment statistics (using the transaction date) and proper
tax results (using the original date of the C acquisition for all 3 issues)?
For example, would a 12/31/05 balance sheet show any shares of Realogy or
Wyndham?

>>> What I still don't understand is why Quicken puts the Buy and Return
>>> of Capital transactions back on the original purchase date of the
>>> parent company, in this case Cendant.
>>
>>If you are showing a Buy, you are doing it wrong. If you show a Return of
>>Capital, then you are doing it wrong.
>
> Are you saying that's not how Quicken records a tax-free spinoff? (If
> so, I disagree.) Or are you saying Quicken does it wrong? (I agree.)

I now agree that this is how Quicken handles it. And we agree that Quicken
does it wrong.

YOU were not doing it wrong, but Quicken was changing it after you entered
it. Q now does it wrong but gets the right answer. As you said:

> There's no Spinoff transaction in a Quicken register, but the spinoff
> can be correctly recorded by doing what I suggested in the above post
> - entering the spinoff, and then changing Quicken's Buy and RtrnCap
> transactions (found in the register on the basis date) to Add and
> RtrnCapX transactions on the spinoff date. The labels might be wrong,
> but I believe the effect is the same as if Quicken had a proper
> spinoff transaction.

Agreed.

Now that we agree on "simple" spinoffs of a single subsidiary, let's talk
about multiple simultaneous spinoffs from a single corporation.

>>Step by step, in Quicken, how do you handle multiple
>>simultaneous spinoffs from a single corporation?

Do you disagree with my treatment? That is, for the first spinoff, show the
FMV ("Cost", as Q calls it) of the parent by including the FMV of any one or
more remaining subs. Then, for the final spinoff, use the FMV of the parent
only. This works in my dummy transactions, but I haven't had a chance to
test it in the real world.

The whole theory of allocating cost or basis in a spinoff. of course, is
that the original basis will be allocated in the ratios of fair market
values after the transaction. Since Q handles only a single spinoff at a
time, the first transaction recorded must allocate the old basis between FMV
of the new sub and the parent, but the parent's FMV still includes the FMV
of any remaining subs. If there are more than two subs being spun off, then
we have to exclude the FMV of subs already spun off, but include any
remaining subs. When we get down to the last one, the allocation will be
like a single spinoff, using the post-spinoff FMV of the stripped-down
parent alone and of that last sub.

I haven't had to do an OID transaction in a while, so I'll let you handle
that one. ;<)

Thanks again for pointing out the way Quicken handles spinoffs nowadays!
And I hope that all my cutting and pasting hasn't made my post too
confusing. ;^}

RC
--
R. C. White, CPA [RC]
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(currently running Windows Mail 7 in Vista x64 Build 5472)

>
>>Hi, Walt.
>>
>>> Apparently Quicken now correctly calculates the cost basis for
>>> multiple spinoffs. This wasn't the case four years ago.
>>
>>Are you sure? Step by step, in Quicken, how do you handle multiple
>>simultaneous spinoffs from a single corporation?
>>
> I was sure four years ago, but since it works in Q06 there's no point
> in trying to reconstruct a fixed bug.
>
>>> This causes the spun-off shares
>>> to appear in the account long before they are actually there, messing
>>> up the historical records, net worth calculations, etc.
>>
>>Yes, sadly, this is what happens in Quicken. :>( It has always been this
>>way in Quicken, so far as I know. To correct the situation would take a
>>large investment of programming effort, I suspect. The program would have
>>to keep track of both the real-life dates and the "as if" dates that the
>>tax
>>code prescribes.
>
> It already does that. Enter an Add Shares transaction and you will
> see that there is a transaction date and a Date acquired (basis date).
> This was added some years back when they fixed most of their basis
> date bug. That took them five years to fix, because of the
> programming effort you mention.
>
> However, although they now have the tools to record a spinoff
> correctly, for some reason they still don't.
>
>>> What I still don't understand is why Quicken puts the Buy and Return
>>> of Capital transactions back on the original purchase date of the
>>> parent company, in this case Cendant.
>>
>>If you are showing a Buy, you are doing it wrong. If you show a Return of
>>Capital, then you are doing it wrong.
>
> Are you saying that's not how Quicken records a tax-free spinoff? (If
> so, I disagree.) Or are you saying Quicken does it wrong? (I agree.)
>
> There's no Spinoff transaction in a Quicken register, but the spinoff
> can be correctly recorded by doing what I suggested in the above post
> - entering the spinoff, and then changing Quicken's Buy and RtrnCap
> transactions (found in the register on the basis date) to Add and
> RtrnCapX transactions on the spinoff date. The labels might be wrong,
> but I believe the effect is the same as if Quicken had a proper
> spinoff transaction.
>
> RtrnCapX to the same account is the same as a basis adjustment. This
> is useful in other contexts. For example, when I do my taxes and have
> to record Original Issue Discount (as on a zero coupon bond or
> inflation-adjusted T-bill), I adjust the basis upward by entering a
> Return of Capital for >> minus << the OID amount, with the same
> account as the transfer account. This adjusts the basis without
> changing the acount's cash balance.
>
> Without adjusting the basis upward for OID, there is a risk of paying
> tax twice, once on the OID and once as a capital gain when the
> security is sold.


Posted by aamato1 on August 10, 2006, 12:09 pm
Please log in for more thread options
RC,

Okay, I'm just getting a little confused here. Is the way you initially
explained to enter the Cendant spin-off, the correct way to enter it or
do any modifications need to be made due to Walt's points?

I entered it in the way you explained it and it seems correct to me. Am
I missing something?

I'm not sure if it matter at this time but I'm using Quicken 2006.

Thanks.
Anthony

R. C. White wrote:
> Hi, Walt.
>
> First, I apologize for coming on too strong in my post yesterday. When I
> took another look at the Dummy entries I made yesterday to record Cendant's
> example, I saw that Quicken has CHANGED my entries! I know I did not use
> RtrnCap or Buy, but that is how the entries are now shown in my Register.
>
> I'm tempted to put the rest of my comments inline, but I want to change the
> sequence so I'll just quote extensively and add comments...
>
> > Enter an Add Shares transaction and you will
> > see that there is a transaction date and a Date acquired (basis date).
> > This was added some years back when they fixed most of their basis
> > date bug.
>
> I've seen some discussion of this here, but haven't experienced it myself.
> Now, I when I click on one of the transactions that Q changed to "Bought"
> and then click Edit, I still don't see a place to enter a second date in the
> Buy window. But when I click on the "Enter transaction" drop-down box and
> choose "Add - Shares Added", I see that Q changes the window. It leaves
> most of the numbers unchanged, but adds a "Date acquired" box, with the
> 7/31/2006 date already filled in, and changes the "Transaction date" box to
> 8/8/2005, the date I used for my dummy purchase of C. It also adds a Memo
> entry: "Non taxable spin-off on 7/31/2006".
>
> In your experience, does this allow Q to produce both proper historical
> statements and investment statistics (using the transaction date) and proper
> tax results (using the original date of the C acquisition for all 3 issues)?
> For example, would a 12/31/05 balance sheet show any shares of Realogy or
> Wyndham?
>
> >>> What I still don't understand is why Quicken puts the Buy and Return
> >>> of Capital transactions back on the original purchase date of the
> >>> parent company, in this case Cendant.
> >>
> >>If you are showing a Buy, you are doing it wrong. If you show a Return of
> >>Capital, then you are doing it wrong.
> >
> > Are you saying that's not how Quicken records a tax-free spinoff? (If
> > so, I disagree.) Or are you saying Quicken does it wrong? (I agree.)
>
> I now agree that this is how Quicken handles it. And we agree that Quicken
> does it wrong.
>
> YOU were not doing it wrong, but Quicken was changing it after you entered
> it. Q now does it wrong but gets the right answer. As you said:
>
> > There's no Spinoff transaction in a Quicken register, but the spinoff
> > can be correctly recorded by doing what I suggested in the above post
> > - entering the spinoff, and then changing Quicken's Buy and RtrnCap
> > transactions (found in the register on the basis date) to Add and
> > RtrnCapX transactions on the spinoff date. The labels might be wrong,
> > but I believe the effect is the same as if Quicken had a proper
> > spinoff transaction.
>
> Agreed.
>
> Now that we agree on "simple" spinoffs of a single subsidiary, let's talk
> about multiple simultaneous spinoffs from a single corporation.
>
> >>Step by step, in Quicken, how do you handle multiple
> >>simultaneous spinoffs from a single corporation?
>
> Do you disagree with my treatment? That is, for the first spinoff, show the
> FMV ("Cost", as Q calls it) of the parent by including the FMV of any one or
> more remaining subs. Then, for the final spinoff, use the FMV of the parent
> only. This works in my dummy transactions, but I haven't had a chance to
> test it in the real world.
>
> The whole theory of allocating cost or basis in a spinoff. of course, is
> that the original basis will be allocated in the ratios of fair market
> values after the transaction. Since Q handles only a single spinoff at a
> time, the first transaction recorded must allocate the old basis between FMV
> of the new sub and the parent, but the parent's FMV still includes the FMV
> of any remaining subs. If there are more than two subs being spun off, then
> we have to exclude the FMV of subs already spun off, but include any
> remaining subs. When we get down to the last one, the allocation will be
> like a single spinoff, using the post-spinoff FMV of the stripped-down
> parent alone and of that last sub.
>
> I haven't had to do an OID transaction in a while, so I'll let you handle
> that one. ;<)
>
> Thanks again for pointing out the way Quicken handles spinoffs nowadays!
> And I hope that all my cutting and pasting hasn't made my post too
> confusing. ;^}
>
> RC
> --
> R. C. White, CPA [RC]
> San Marcos, TX
> (Retired. No longer licensed to practice public accounting.)
> rc@grandecom.net
> Microsoft Windows MVP
> (currently running Windows Mail 7 in Vista x64 Build 5472)
>
> >
> >>Hi, Walt.
> >>
> >>> Apparently Quicken now correctly calculates the cost basis for
> >>> multiple spinoffs. This wasn't the case four years ago.
> >>
> >>Are you sure? Step by step, in Quicken, how do you handle multiple
> >>simultaneous spinoffs from a single corporation?
> >>
> > I was sure four years ago, but since it works in Q06 there's no point
> > in trying to reconstruct a fixed bug.
> >
> >>> This causes the spun-off shares
> >>> to appear in the account long before they are actually there, messing
> >>> up the historical records, net worth calculations, etc.
> >>
> >>Yes, sadly, this is what happens in Quicken. :>( It has always been this
> >>way in Quicken, so far as I know. To correct the situation would take a
> >>large investment of programming effort, I suspect. The program would have
> >>to keep track of both the real-life dates and the "as if" dates that the
> >>tax
> >>code prescribes.
> >
> > It already does that. Enter an Add Shares transaction and you will
> > see that there is a transaction date and a Date acquired (basis date).
> > This was added some years back when they fixed most of their basis
> > date bug. That took them five years to fix, because of the
> > programming effort you mention.
> >
> > However, although they now have the tools to record a spinoff
> > correctly, for some reason they still don't.
> >
> >>> What I still don't understand is why Quicken puts the Buy and Return
> >>> of Capital transactions back on the original purchase date of the
> >>> parent company, in this case Cendant.
> >>
> >>If you are showing a Buy, you are doing it wrong. If you show a Return of
> >>Capital, then you are doing it wrong.
> >
> > Are you saying that's not how Quicken records a tax-free spinoff? (If
> > so, I disagree.) Or are you saying Quicken does it wrong? (I agree.)
> >
> > There's no Spinoff transaction in a Quicken register, but the spinoff
> > can be correctly recorded by doing what I suggested in the above post
> > - entering the spinoff, and then changing Quicken's Buy and RtrnCap
> > transactions (found in the register on the basis date) to Add and
> > RtrnCapX transactions on the spinoff date. The labels might be wrong,
> > but I believe the effect is the same as if Quicken had a proper
> > spinoff transaction.
> >
> > RtrnCapX to the same account is the same as a basis adjustment. This
> > is useful in other contexts. For example, when I do my taxes and have
> > to record Original Issue Discount (as on a zero coupon bond or
> > inflation-adjusted T-bill), I adjust the basis upward by entering a
> > Return of Capital for >> minus << the OID amount, with the same
> > account as the transfer account. This adjusts the basis without
> > changing the acount's cash balance.
> >
> > Without adjusting the basis upward for OID, there is a risk of paying
> > tax twice, once on the OID and once as a capital gain when the
> > security is sold.


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