Multiple Corporate Spinoffs (Cendant)

Posted by Walt Bilofsky on August 2, 2006, 9:53 am

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Cendant is in the process of spinning off several corporations.

I seem to recall that Quicken used to mess up the cost basis in these
cases. Has that been fixed in or before Q2006?

If not, here's a couple of old posts that discuss methods for entering
the transactions correctly:

http://groups.google.com/group/alt.comp.software.financial.quicken/browse_frm/thread/e93dce9e958cc693/9c9733db8c1e6280?lnk=st&q=&rnum=4&hl=en#9c9733db8c1e6280

Another set of instructions with more explanation:

http://groups.google.com/group/alt.comp.software.financial.quicken/browse_frm/thread/aff77f9b050a482d/9816702eee2678ea?lnk=st&q=&rnum=1&hl=en#9816702eee2678ea

Posted by aamato1 on August 8, 2006, 5:48 pm

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Thanks for your post about the Cendant spin-off. I'm still not getting
this correct. Can you help me out?

The only thing I was able to figured out is the new shares issued
number. That should be .25 for REALOGY CORP and .2 for WYNDHAM
WORLDWIDE CORP. Here is a link to the Tax Basis information from the
Cendant website http://cendant.com/documents/TaxInfoforSHsFINAL.pdf
(which includes an example).

Any help with be greatly appreciated.

Thanks,
Anthony

Walt Bilofsky wrote:

> Cendant is in the process of spinning off several corporations.

> I seem to recall that Quicken used to mess up the cost basis in these

> cases. Has that been fixed in or before Q2006?

> If not, here's a couple of old posts that discuss methods for entering

> the transactions correctly:

http://groups.google.com/group/alt.comp.software.financial.quicken/browse_frm/thread/e93dce9e958cc693/9c9733db8c1e6280?lnk=st&q=&rnum=4&hl=en#9c9733db8c1e6280

> Another set of instructions with more explanation:

http://groups.google.com/group/alt.comp.software.financial.quicken/browse_frm/thread/aff77f9b050a482d/9816702eee2678ea?lnk=st&q=&rnum=1&hl=en#9816702eee2678ea

Posted by R. C. White on August 9, 2006, 12:27 am

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Hi, Anthony.

Thanks for posting that URL. Cendant has gone to the trouble to make the
calculations for their shareholders. Now all you have to do is figure out
how to enter the transaction in Quicken.

First, the key paragraph from that web page:

<paste>
HOW TO CALCULATE YOUR TAX BASIS

You can use the following worksheet to calculate your basis in your Cendant
common stock, Realogy common stock and Wyndham Worldwide common stock, as
well as your gain or loss in respect of any cash received in lieu of a
fractional share of Realogy and Wyndham Worldwide common stock.

Based on the closing price at which Cendant common stock, Realogy common
stock and Wyndham Worldwide common stock traded on August 1, 2006, $2.44,
$26.10 and $31.85, respectively, as reported for the New York Stock Exchange
transactions, 16% of your pre-distribution tax basis should be allocated to
your shares of Cendant common stock; 42.5% should be allocated to your
shares of Realogy common stock (including any fractional share interest);
and 41.5% should be allocated to your shares of Wyndham Worldwide common
stock (including any fractional share interest).

<end of paste>

And they have provided a worksheet. Just start with ONE number, which is
your basis in your Cendant shares. Plug that number into the worksheet and
follow the arithmetic as outlined. Check your first calculations by adding
the 3 amounts in the "New total tax basis" boxes; the total should equal
your original Cendant basis. Then look at the TWO numbers for "Total number
of shares" for Realogy and Wyndham. Knock off any decimal fractions and
make sure that the whole numbers of new Realogy and Wyndham shares are what
you actually got (or will get). Finally, multiply those fractions by $26.10
for Realogy and $31.85 for Wyndham and make sure those are the amounts of
the checks you received for fractional shares.

Now the hard part: entering it in Quicken. The Intuit programmers never
expected a company to spin off more than one subsidiary at one time, so the
program provides no automatic way to handle it. We have to lie to Quicken
and tell it that only Realogy was spun off - and then lie to it again and
say that only Wyndham was spun off. For Quicken to get the arithmetic
right, we have to include the remaining subsidiary in the parent's value
when we record the spinoff of the first sub. And we have to overlook a
serious error in Quicken's terminology.

So, start by recording that only Realogy was spun off. In the Enter
transaction drop-down list, choose Corporate Securities Spin-Off. Enter the
Transaction date (July 31, 2006), the Security name (Cendant) and New
Company (Realogy). In New share issued per old share, enter .25 (one for
every 4 Cendant shares). In the next two boxes, Quicken asks for "Cost" of
the old and new shares. This is a serious error that has been in every
Quicken version for many years. What we must enter here is the Fair Market
Value (FMV) of the shares immediately after the spin-off transaction.
Cendant has given us these numbers, so we should be able to simply enter
$2.44 for each "old" Cendant share and $26.10 for each "new" Realogy share.
But this is where the lie comes in.

At this point, if we say that ONLY Realogy was spun off, then we must
consider that Cendant still included the value of the Wyndham assets. In
other words, we must include the value of .2 of the new Wyndham shares (one
for every 5 Cendant shares) in the FMV of the "old" shares. So for "Cost"
of the old shares, we must enter $2.44 + (.2 * $31.85 = $6.37) = $8.81. For
the new shares, enter $26.10.

So, for the Realogy spinoff, enter as what Quicken calls "cost", $8.81 for
the old shares and $26.10 for the new Realogy shares.

When Quicken records this spinoff of Realogy, it will reduce your basis of
Cendant, so we won't have to lie for the second spinoff.

For the Wyndham spinoff, just enter $2.44 per share for the old shares and
$31.85 for the new shares.

Test your work by adding your total basis (including fractional shares) in
all 3 companies before you record sales of any fractional shares. The total
should be the same as your pre-spinoff basis in Cendant. The Cendant
worksheet says that your new Cendant basis is 16% of your prior basis, your
total Realogy basis is 42.5% and your basis of all your Wyndham shares is
41.5% of your old Cendant basis. However, this is not quite accurate,
probably because of rounding. In their example, the FMV of 102 shares of
Cendant at $2.44 would be $248.88; 25.5 shares of Realogy at $26.10 would be
$665.55; and 20.4 shares of Wyndham at $31.85 would be $649.74, for a total
of $1,564.17, or $34.17 more than the $1,530.00 total basis. (The investor
in the example had a $34.17 unrealized gain at the time of the spinoff.
That has no bearing on our problem, except that we allocate the $1,530.00
basis on the ratios of the FMVs to $1,564.17.) Cendant's share of the total
FMV is 248.88/1564.17, or 15.9113% of the total, not 16%. Realogy's share
is 42.5497% and Wyndham's is 41.5390%. In this case, Quicken's calculation
is slightly more accurate.

If this were a taxable spinoff, your treatment would be much different.
But, since it was designed by Cendant to qualify as a tax-free spinoff, you
will recognize no gain except for sale of the fractional shares, and your
"holding period" for the new shares will include the time that you have held
Cendant; in other words, your acquisition date for Realogy and Wyndham will
be the date you acquired Cendant.

Remember that I've been retired for more than a dozen years, and tax rules
change every day. Be sure to consult with your own CPA to see if the rules
I remember still apply.

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 for your post about the Cendant spin-off. I'm still not getting

> this correct. Can you help me out?

> The only thing I was able to figured out is the new shares issued

> number. That should be .25 for REALOGY CORP and .2 for WYNDHAM

> WORLDWIDE CORP. Here is a link to the Tax Basis information from the

> Cendant website http://cendant.com/documents/TaxInfoforSHsFINAL.pdf

> (which includes an example).

> Any help with be greatly appreciated.

> Thanks,

> Anthony

> Walt Bilofsky wrote:

>> Cendant is in the process of spinning off several corporations.

>> I seem to recall that Quicken used to mess up the cost basis in these

>> cases. Has that been fixed in or before Q2006?

>> If not, here's a couple of old posts that discuss methods for entering

>> the transactions correctly:

http://groups.google.com/group/alt.comp.software.financial.quicken/browse_frm/thread/e93dce9e958cc693/9c9733db8c1e6280?lnk=st&q=&rnum=4&hl=en#9c9733db8c1e6280

>> Another set of instructions with more explanation:

http://groups.google.com/group/alt.comp.software.financial.quicken/browse_frm/thread/aff77f9b050a482d/9816702eee2678ea?lnk=st&q=&rnum=1&hl=en#9816702eee2678ea

Posted by aamato1 on August 9, 2006, 11:05 am

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RC,

That was excellent!

I had filled out the worksheep from the Cendant website, but as you
know the big problem is trying to get into Quicken.

You are correct about the rounding. I was off by $1 and change on the
basis...but no big deal.

Thank you very much for the accurate and detailed explaination.

Posted by Walt Bilofsky on August 9, 2006, 3:51 pm

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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?