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Posted by R. C. White on November 22, 2006, 10:17 pm
Please log in for more thread options Hi, Jim.
> Hi RC, thanks for this. Verizon's SEC filing specifies that
> they have a letter from the SEC identifying this spinoff as
> a 'tax-free' transaction. Does this affect your calculation
> at all? Or does it perhaps simply mean that no income tax
> is due on this spinoff, in contrast to normal dividends.
>
> -jim
That letter might be from the IRS, rather than the SEC. Companies typically
ask the IRS for a "private ruling" that the proposed transaction, if carried
out as outlined to the IRS, will qualify under specific sections of the
Internal Revenue Code (Sec. 355 if I remember correctly) as a tax-free
split-off. (There's a technical difference between a spinoff and a
split-off, but I don't recall what it is and it usually is referred to as a
spinoff anyhow.) This transaction does not generate a tax currently, but
the carryover of the old basis (split between the old and new shares) means
that the gain (presumably) that is not taxed now will be deferred until the
shares are sold in the future. It really is a "tax-deferred" spinoff,
rather than "tax-free".
What I described in my first message IS a tax-free spinoff. If this were a
taxable transaction, it would require much different treatment, most likely
as a dividend to the shareholders in the amount of the fair market value of
the new shares, with the new shares' bases equal to that FMV and their
holding period starting on the date of the spinoff - and with the old
shares' bases left unchanged. But we don't need to worry about all that,
thank goodness!
As I said earlier, check with your own CPA for the current rules.
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 x64)
> R. C. White wrote:
>> Hi, P.
>>
>> There have been many discussions here about spinoffs over the years. In
>> skeleton form, the steps are these:
>>
>> 1. Visit the websites for the companies involved, especially the parents
>> (Verizon, e.g.) and look for a page called something like Investor
>> Relations. These often have all the data you will need for later steps.
>> Often they even have sample worksheets for you.
>>
>> 2. Use Quicken's built-in method to record the transaction. (In Q2007,
>> choose "Corporate Securities Spin-Off" from the drop-down list in your
>> Investment Register's Enter Transactions tab; earlier versions called it
>> Easy Actions. You did not mention which version of Quicken you are
>> using.)
>>
>> Remember in Step 2 that Quicken has a longstanding error in terminology
>> on this spinoff screen. It asks for "cost" per old share and per new
>> share. In both places, it should be asking for Fair Market Value of the
>> shares immediately after the spinoff. These values can be found in
>> several ways; the best and easiest is from the web page mentioned in Step
>> 1 above. The goal of this whole transaction is to simply allocate your
>> old basis in the old shares over your old and new shares in the ratio of
>> their post-spinoff values. After the transaction is recorded, your total
>> bases in all the shares should be unchanged from your pre-spinoff basis
>> in your old shares.
>>
>> 3. Often, there are fractional shares involved. These are typically
>> sold immediately after the spinoff as a part of the orchestrated
>> transaction and the shareholder receives cash for the fractional shares.
>> AFTER you compute the per-share basis of the new shares in Step 2, record
>> sale of the fractional new share on the date of the spinoff for the
>> amount of cash received; the gain or loss on the fractional share should
>> be reported on your income tax return. The holding period for
>> determining long-term status is the same for the new shares as for the
>> old.
>>
>> 4. After the spinoff, each issue stands alone. If you sell your new
>> shares (your EQ, for example), report the sale like any other. Use the
>> parent's acquisition date as the date acquired; even if you sold EQ the
>> next day, your gain might be long-term if you had held the Sprint shares
>> for a long time.
>>
>> Remember that I've been retired for over a decade and tax rules change
>> daily, so please check with your own CPA to be sure that these rules
>> haven't changed.
>>
>> RC
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