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Subject Author Date
spin off D. Blair Favrot 04-07-2008
---> Re: spin off R. C. White04-08-2008
Posted by D. Blair Favrot on April 8, 2008, 4:45 pm
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 Thank you rc and eric. Eric sent me a method that I used before I placed my
inquiry on the web site but was in hopes Quicken had a short cut like for a
return of capital using RC under action, somehow keeping the original
acquistion date. I'm on a MAC and quicken 2006 and am not familiar with the
Quicken's wizard.

Blair



"R. C. White" wrote:

> Hi, Blair.
>
> This topic comes up at least a couple of times a year here, so the archives
> are rich with information about spin-offs.
>
> The simple explanation is that cost of the original shares is allocated on
> the ratio of FMV (Fair Market Value) of the old and new shares immediately
> after the transaction.
>
> Quicken's wizard (formerly called Easy Actions) for Corporate Securities
> Spin-Off handles it correctly, but still (in Q2008 Deluxe) has a
> long-standing misleading caption that causes confusion. Where it asks for
> "Cost per old share ___ (post spin-off)" and "Cost per new share ___", it
> should ask for FMV per share immediately after the spin-off. "Cost" of the
> shares is what we are trying to determine, so we don't know those numbers
> until the calculations are done.
>
> Everybody knows the FMV of the old shares before the spin-off, but nobody
> knows until "the morning after" how much of that value is represented by the
> assets that are about to be spun off. After the transaction, the prices at
> which the deflated shares of the original company trade, and the prices paid
> for the new shares, can tell us what percentage of the original value was
> attributable to the assets spun into the new company. If the shares of the
> spun-off company sell for $20 and the old shares now sell for $80, we can
> calculate that 20% of the value of the previous whole package was
> attributable to those shares. So we allocate 20% of what we paid for our
> original shares to the shares in the new company that we receive, reducing
> our basis in our original shares to 80% of what we actually paid for the
> whole package.
>
> That simple example assumes a 1-for-1-share spin-off. If we receive 5
> shares of the new company for every 1 share that we hold in the old company,
> then we must multiply the per-share FMV of each new share by 5 to see how
> much of the original value is represented by the spun-out assets.
>
> Obviously, nobody can do anything but guess about these ratios until some
> actual transactions have taken place AFTER the deal. And there are several
> different ways to determine those FMVs (opening transaction on the day
> after, closing quote that day, average of high and low - and others). But
> the parent company's lawyers, accountants and investment bankers will
> produce their version within a day or two after the transaction and we can
> be pretty sure that the IRS will not disagree if we use those values. As
> Eric said, all the details we need - except how to enter it in Quicken -
> will probably be on the parent company's website in less than a week,
> probably under Investor Relations or some similar heading. (We can probably
> help you find the page if you tell us the name of the company.)
>
> In Quicken, just follow the steps, making sure to enter the per-share FMVs,
> not the cost, of old and new shares, and Quicken should do the rest. If you
> held multiple lots of old shares, Quicken will adjust each of them
> automatically. The only caveat is that, if you look back to a historical
> point before the spin-off, you will see shares of a spun-off company that
> didn't even exist at that time. This is because the tax rules treat the new
> shares as though they were acquired when the original shares were acquired.
> Just remember to watch out for this tax code provision which can't easily be
> handled in a program like Quicken.
>
> Remember that I've been retired for over a dozen years, Blair, and tax rules
> change daily, so be sure to check with your own CPA to be sure that my
> explanation is still accurate and current.
>
> RC
> --
> R. C. White, CPA
> San Marcos, TX
> (Retired. No longer licensed to practice public accounting.)
> rc@grandecom.net
> Microsoft Windows MVP
> (Currently running Quicken 2008 Deluxe in Vista Ultimate x64 SP1)
>
> > How is the allocation of cost basis made upon a spin off?
> >
> > blair Favrot


Posted by Ron on April 9, 2008, 4:45 pm
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>> .... The only caveat is that, if you look back to a historical
>> point before the spin-off, you will see shares of a spun-off company that
>> didn't even exist at that time. This is because the tax rules treat the
>> new
>> shares as though they were acquired when the original shares were
>> acquired.
>> Just remember to watch out for this tax code provision which can't easily
>> be
>> handled in a program like Quicken.
>>

And if those original shares were acquired by years of dividend
reinvestment, all of which you've dutifully entered as individual
transactions, be prepared for a symphony of kerchungs as each one is
adjusted in succession. I shudder to contemplate what might be necessary if
such a spinoff needed to be edited :(


Posted by TomYoung on April 11, 2008, 12:06 pm
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> In Quicken, just follow the steps, making sure to enter the per-share FMVs,
> not the cost, of old and new shares, and Quicken should do the rest. If you
> held multiple lots of old shares, Quicken will adjust each of them
> automatically. The only caveat is that, if you look back to a historical
> point before the spin-off, you will see shares of a spun-off company that
> didn't even exist at that time. This is because the tax rules treat the new
> shares as though they were acquired when the original shares were acquired.
> Just remember to watch out for this tax code provision which can't easily be
> handled in a program like Quicken.

I have to disagree with that last sentence. A little bit of simple
programming - I think - should allow Quicken to present a logical and
correct result of a spin-off, i.e., correct basis allocation between
old and new companies, correct tax acquisition dates for lots of new
company stock, and the "appearance" of new company stock in Quicken's
registers as of the date of the spin-off, not years before the new
company existed as a stand-alone entity as Quicken does now. Maybe
it's harder to do this programmatically then I'm anticipating it is,
but I don't think so. The spin-off wizard has been a problem for
years and I'm surprised Quicken has never addressed it.

Tom Young

Posted by John Pollard on April 11, 2008, 2:10 pm
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TomYoung wrote:
>
>
>> In Quicken, just follow the steps, making sure to enter the
>> per-share FMVs, not the cost, of old and new shares, and
>> Quicken
>> should do the rest. If you held multiple lots of old shares,
>> Quicken will adjust each of them automatically. The only
>> caveat is
>> that, if you look back to a historical point before the
>> spin-off,
>> you will see shares of a spun-off company that didn't even
>> exist at
>> that time. This is because the tax rules treat the new
>> shares as
>> though they were acquired when the original shares were
>> acquired.
>> Just remember to watch out for this tax code provision which
>> can't
>> easily be handled in a program like Quicken.

> I have to disagree with that last sentence. A little bit of
> simple
> programming - I think - should allow Quicken to present a
> logical and
> correct result of a spin-off, i.e., correct basis allocation
> between
> old and new companies, correct tax acquisition dates for lots
> of new
> company stock, and the "appearance" of new company stock in
> Quicken's
> registers as of the date of the spin-off, not years before the
> new
> company existed as a stand-alone entity as Quicken does now.
> Maybe
> it's harder to do this programmatically then I'm anticipating
> it is,
> but I don't think so. The spin-off wizard has been a problem
> for
> years and I'm surprised Quicken has never addressed it.

I suspect it's more a question of the relative net benefit of
making the change. There is undoubtedly a long list of "things
to do" for Quicken; Intuit isn't stupid, so they probably weigh
the costs and benefits of each of the items on that list and act
accordingly. Virtually none of the information required to
determine what's in the to-list, the cost, the benefit, and the
relative position of the net-benefit on the to-do list, is
available to anyone outside Intuit. But Quicken's market share
indicates that Intuit does a pretty good job deciding what to
put in and what to leave out.

Still, users aren't stuck with Quicken's output for a spinoff:
you can change the results so the ownership of the new security
begins on the date of the spinoff and the cost
basis/acquisition-dates remain correct.

Modify the "Buy" transactions to be "Shares Added" transactions,
with the date purchased in the "Date Acquired" field and the
cost in the "Total cost" field, and change the transaction date
to the date of the spinoff. [When you change the transaction
from Buy to Shares Added, Quicken should fill in the fields for
you; the only "change" needed should be the transaction date.]

Then, since there are no longer any Buy transactions to soak up
the cash from the return-of-capital transactions, change those
RtrnCap transactions to "transfer" the cash to the same account
where the return-of-capital transactions are entered.

Still, I too would prefer it, if Quicken did it that way and
saved us the effort ... all other things being equal.

--

John Pollard
First initial underscore Last name at mchsi dot com
Please reply to newsgroup



Posted by TomYoung on April 11, 2008, 5:31 pm
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> TomYoung wrote:
>
> >> In Quicken, just follow the steps, making sure to enter the
> >> per-share FMVs, not the cost, of old and new shares, and
> >> Quicken
> >> should do the rest. If you held multiple lots of old shares,
> >> Quicken will adjust each of them automatically. The only
> >> caveat is
> >> that, if you look back to a historical point before the
> >> spin-off,
> >> you will see shares of a spun-off company that didn't even
> >> exist at
> >> that time. This is because the tax rules treat the new
> >> shares as
> >> though they were acquired when the original shares were
> >> acquired.
> >> Just remember to watch out for this tax code provision which
> >> can't
> >> easily be handled in a program like Quicken.
> > I have to disagree with that last sentence. A little bit of
> > simple
> > programming - I think - should allow Quicken to present a
> > logical and
> > correct result of a spin-off, i.e., correct basis allocation
> > between
> > old and new companies, correct tax acquisition dates for lots
> > of new
> > company stock, and the "appearance" of new company stock in
> > Quicken's
> > registers as of the date of the spin-off, not years before the
> > new
> > company existed as a stand-alone entity as Quicken does now.
> > Maybe
> > it's harder to do this programmatically then I'm anticipating
> > it is,
> > but I don't think so. The spin-off wizard has been a problem
> > for
> > years and I'm surprised Quicken has never addressed it.
>
> I suspect it's more a question of the relative net benefit of
> making the change. There is undoubtedly a long list of "things
> to do" for Quicken; Intuit isn't stupid, so they probably weigh
> the costs and benefits of each of the items on that list and act
> accordingly. Virtually none of the information required to
> determine what's in the to-list, the cost, the benefit, and the
> relative position of the net-benefit on the to-do list, is
> available to anyone outside Intuit. But Quicken's market share
> indicates that Intuit does a pretty good job deciding what to
> put in and what to leave out.
>
> Still, users aren't stuck with Quicken's output for a spinoff:
> you can change the results so the ownership of the new security
> begins on the date of the spinoff and the cost
> basis/acquisition-dates remain correct.
>
> Modify the "Buy" transactions to be "Shares Added" transactions,
> with the date purchased in the "Date Acquired" field and the
> cost in the "Total cost" field, and change the transaction date
> to the date of the spinoff. [When you change the transaction
> from Buy to Shares Added, Quicken should fill in the fields for
> you; the only "change" needed should be the transaction date.]
>
> Then, since there are no longer any Buy transactions to soak up
> the cash from the return-of-capital transactions, change those
> RtrnCap transactions to "transfer" the cash to the same account
> where the return-of-capital transactions are entered.

However, there appear to be bugs in this wizard beyond what I'll call
the "style issues" you've discussed; I mentioned a problem back in
2002 where Old Stock Basis After Spin-off + New Stock Basis didn't
equal Old Stock Basis Before Spin-off, (maybe Quicken fixed this,
don't know), and more recently somebody over in the users group at
Quicken.com indicated that although basis *was* allocated properly in
a spin-off *in total* it wasn't allocated correctly among lots. So
Quicken's spin-off wizard certainly has delivered and continues to
deliver wrong answers that are wrong accounting-wise, not wrong merely
as a matter of style or logic.

You are correct that Quicken probably does approach issues like this
on a cost/benefit basis, however their near-monopoly in the personal
finance arena doesn't give them much incentive to fix problems like
the spin-off wizard, an issue that flies below the radar of most
users.

Tom Young

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