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Posted by TomYoung on January 4, 2007, 10:32 pm
Please log in for more thread options Jerry Boyle wrote:
> > TomYoung wrote:
> >> nemo wrote:
> >>> I owned 500 sh DUK on 1/2/07 and received 250 sh of
> >>> SPECTRA (SE) as a spin-off on that date. According to
> >>> DUKE's .pdf, 58.11% of my original cost basis for DUK
> >>> ($14,439.95) is to be allocated to DUK and 41.89% is to
> >>> be allocated to SE.
> >>>
> >>> Do I use the "Corporate Spin-off" dialog, which is very
> >>> confusing to me, and produces startling and inaccurate
> >>> results and marvelous market values. How do I do it
> >>> correctly?
> >
> >> Here's one way to do it. Calculate the split of your
> >> cost basis:
> >> 41.89% to Spectra, the remainder stays with Duke.
> >> Calculate the per-share basis cost of Spectra: (41.89% x
> >> Original Duke Cost Basis) /( # of Duke shares x .5).
> >>
> >> Enter a Return of Capital transaction from Duke on
> >> 1/2/2007 for the amount of the basis allocated to Spectra
> >> and specify the TRANSFER account is the same account
> >> you're working in. Quicken will record a RtrnCapX
> >> transaction that won't affect cash in the account but
> >> will affect the Duke basis.
> >>
> >> Enter a Shares Added transaction for the Spectra shares
> >> on 1/2/2007 with a per share cost as previously
> >> calculted. Enter the "Date Acquired" date as the date of
> >> your original purchase of Duke. Quicken will record an
> >> Added transaction that likewise won't affect cash in the
> >> account but will get the basis and date acquired correct.
> >
> > You have much more knowledge than I about these things; but doesn't your
> > approach assume that all of the Duke shares were purchased in a single
> > lot? (Not an unreasonable assumption based on the op's statement.)
> >
> > I think that for those whose holdings were purchased in multiple lots,
> > there is a benefit to using the Quicken corporate spinoff transaction ...
> > even though, my understanding is that the results would be improved if the
> > Quicken generated return-of-capital transactions were modifed to take the
> > cash from the investment account, and the generated "buy" transactions
> > were changed to "Shares Added" transactions, assigned the original cost
> > basis, with a transaction date matching the date of the spinoff. (Doing
> > what you recommended for one lot; for multiple lots.)
> >
> > I'm thinking that the more original lots there were, the more sense it
> > makes to start with the Quicken spinoff transaction, then plan to modify
> > its results.
> >
> > --
> > John Pollard
> > First initial underscore Last name at mchsi dot com
> > Please reply to newsgroup
> >
>
> Per my limited understanding (someone correct me if I'm wrong) you shouldn't
> use a Return of Capital transaction for a Corporate Spinoff, especially if
> you own multiple lots of the stock. The two have different rules for
> computing the adjusted cost basis (ACB) of the lots of the original stock,
> as the following oversimplified and exaggerated example illustrates:
>
> Assume you bought 1 share of A at $5 and another at $50.
>
> If there is a Corporate Spinoff of B with a value of $11 per share of A, you
> then have a total cost basis for B of $22. This is 40% of the original $55
> basis for A and leaves a $33 ACB for A (60% of the original cost). The ACB
> of the two shares of A is $3 (60% of $5) and $30 (60% of $50).
>
> However, if there is a Return of Capital of $11 per share of A, the $11 is
> subtracted from the cost basis of each share of A, regardless of its
> original cost. This results in an ACB of -$6 ($5 - $11) and $39 ($50 - $11)
> for the original shares of A. For tax purposes the -$6 is treated as $0.
>
> Unfortunately, Quicken versions up to Q2005 (or possibly Q2004) did not make
> the above distinction, and not all cases are fixed even for later Quicken
> versions (sigh). I discovered this problem the hard way when Quicken told me
> I had a Capital Gain of over $13,000 on a sale that *grossed* less than
> $5,000.
>
> A word to the wise...
The problem with your example is that the amount of basis allocated to
B is properly stated as a percent of your basis in A, not a fixed
amount. If the spinoff allocates 40% of the basis in A to B (and
assuming you get one share of B for each share of A) then you have one
share of B with a basis of $2.00 (.4 x $5) and one share of B with a
basis of 20.00 (.4 x $50) or two shares of B with a total basis of $22,
an average of $11 per share. Do the calculations, make the entries (2
of them) appropriately and all will be right with the world.
Tom Young
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