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Posted by Seth Breidbart on February 13, 2007, 10:48 pm
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> Long ago I bought HWP (Hewlett Packard) and long ago sold it
> (as HPQ). Meanwhile, HWP dividended off A (Agilent) which in
> itself dividended off VRGY (Verigy).
. . .
> My problem is that I have no idea what my COST BASIS is for
> the A and VRGY shares are (I sold the HPQ at a loss a few
> years ago).
>
> Can you tell me HOW I am supposed to get my cost basis for
> tax purposes on the A and VRGY shares?
When A was split off, you needed to allocate the cost basis
of HWP to A and HPQ, proportional to their market values
immediately after the split. The same would occur when VRGY
was split off.
When you sold the HPQ, what cost basis did you use? If it
was the full cost of the HWP, that was wrong.
Seth
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Susan Grossman on February 14, 2007, 9:42 pm
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Seth Breidbart wrote:
> When A was split off, you needed to allocate the cost basis
> of HWP to A and HPQ, proportional to their market values
> immediately after the split. The same would occur when VRGY
> was split off.
> When you sold the HPQ, what cost basis did you use? If it
> was the full cost of the HWP, that was wrong.
I received the help I needed from another newsgroup.
With their and your help, I belatedly see the many errors in
my tax thinking. I repeat the essential tax calculations
below (fixing all my real errors) so someone else can easily
follow the proper methodology, even if they were to own a
different stock than I.
Note that four significant figures are often employed
(sometimes six when necessary to avoid mismatches) to
minimize rounding confusion when dropping back to two
decimal places.
Hopefully this helps others avoid pulling their hair out for
taxes!
A. In 1998, you pay $5,475.40 for 100 shares of Hewlett
Packard (HWP). All calculations below are unavoidable tax
consequences of that act.
B. On June 2, 2000, shareholders received 0.3814 shares of
Agilent (A) for every share of HWP, resulting in: 100
shares HWP x 0.3814 = 38.1400 shares of Agilent.
You must obtain the HWP to A spinoff calculations from HWP:
http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-faqAgilent
You must perform the following seven (7) calculations.
1. You must recalculate the HWP cost basis:
The new HWP cost basis was 78% of the original HWP cost basis.
New cost basis for HWP = 78% of the original cost basis for HWP
New cost basis for HWP = 78/100 x $5,475.40
New cost basis for HWP = 0.78 x $5,475.40
New cost basis for HWP = $4,270.8120
2. You must calculate the aggregate Agilent cost basis:
The aggregatge Acost basis was 22% of the original HWP cost basis.
Aggregate Agilent cost basis = 22/100 x $5,475.40
Aggregate Agilent cost basis = 0.22 x $5,475.40
Aggregate Agilent cost basis = $1,204.5880
Proof is the new cost basis should always equal the old cost basis:
Old cost basis HWP = New HWP cost basis + aggregate A cost basis
Old cost basis HWP = $4,270.8120 + $1,204.5880
Old cost basis HWP = $5,475.40 (check)
3. You must calculate the aggregate Agilent cost basis per
share:
Aggregate A cost basis per share = A cost basis/number of shares
Aggregate A cost basis per share = $1,204.588/38.14 shares
Aggregate A cost basis per share = $31.5833/share
4. You must calculate the Agilent fractional share cost
basis:
Agilent fractional share cost basis = 0.14 share x $31.5833/share
Agilent fractional share cost basis = $4.4217
5. You must calculate the Agilent fractional share sale
basis:
Agilent was trading at $81.75 on June 2, 2000 when the
Agilent fractional share was sold beyond your control.
Agilent fractional share sale basis = $81.75/share x 0.14 shares
Agilent fractional share sale basis = $11.4450
6. You must calculate the Agilent fractional long term
capital gain:
Fractional share LTCG = fractional sale basis - fractional cost basis
Fractional share LTCG = $11.4450 - $4.4217
Fractional share LTCG = $7.0233
LTCG taxes must be paid on the $7.03 in tax year 2000.
7. You must calculate the Agilent whole share cost basis:
Whole share A cost basis = Aggregate cost basis - fractional cost basis
Whole share A cost basis = $1,204.5880 - $4.4217
Whole share A cost basis = $1,200.1663
Proof is 38 shares x $31.5833/share = $1,200.1654 (check)
C. HWP split 2:1 on October 27, 2000 resulting in 200 shares
of HPQ. Note the symbol changed from HWP to HPQ at this
point in time.
You must obtain the HWP to HPQ split & symbol change
calculations:
http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-stockSplit
D. Selling 200 shares of HPQ in 2001 for $5,307.87 triggered
an event:
LTCG for HPQ = sale basis of HPQ - cost basis of HPQ
LTCG for HPQ = $5,307.87 - $4,270.81
LTCG for HPQ = $1,037.06
LTCG taxes must be paid on the $1,037.06 in tax year 2001.
E. On October 31, 2006, shareholders received 0.122435 shares of
Verigy (VRGY) for every share of Agilent, resulting in:
38 shares A x 0.122435 = 4.6530 shares of VRGY
You must obtain the Agilent to Verigy spinoff calculations:
http://media.corporate-ir.net/media_files/irol/10/103274/VRGY/VRGY_InformationStatement.pdf
You must perform the following seven (7) calculations.
1. You must recalculate a new Agilent cost basis:
The new A cost basis was 94.22% of the previous A cost
basis.
New cost basis for Agilent = 94.22/100 x $1,200.1663
New cost basis for Agilent = 0.9422 x $1,200.1663
New cost basis for Agilent = $1,130.7967
2. You must calculate the aggregate Verigy cost basis:
The aggregate VRGY cost basis was 5.78% of the previous
A cost basis.
Aggregate Verigy cost basis = 5.78/100 x $1,200.1663
Aggregate Verigy cost basis = 0.0578 x $1,200.1663
Aggregate Verigy cost basis = $69.3696
Proof is the new cost basis should always equal the old
cost basis:
Old Agilent cost basis = New A cost basis + aggregate V
cost basis
Old Agilent cost basis = $1,130.7967 + $69.3696
Old Agilent cost basis = $1,200.1663 (check)
3. You must calculate the aggregate Verigy cost basis per share:
Aggregate VRGY cost basis per share = VRGY cost basis/number of shares
Aggregate VRGY cost basis per share = $69.3696/4.6530 shares
Aggregate VRGY cost basis per share = $14.9086/share
4. You must calculate the Verigy fractional share cost basis:
Verigy fractional share cost basis = 0.6530 share x $14.9086/share
Verigy fractional share cost basis = $9.7353
5. You must calculate the Verigy fractional share sale basis:
Verigy was trading at $16.80/share on October 31, 2006 when
the Verigy fractional share was sold beyond your control.
Verigy fractional share sale basis = $16.80/share x 0.6530 shares
Verigy fractional share sale basis = $10.9704
6. You must calculate the Verigy fractional long term capital gain:
Fractional share LTCG = fractional sale basis - fractional cost basis
Fractional share LTCG = $10.9704 - $9.7353
Fractional share LTCG = $1.2351
LTCG taxes must be paid on the $1.2351 in tax year 2006
7. You must calculate the Verigy whole share cost basis:
Whole share VRGY basis = Aggregate basis - fractional basis
Whole share VRGY cost basis = $69.3696 - $9.7353
Whole share VRGY cost basis = $59.6343
Proof is 4 shares x $14.9086/share = $59.6344 (check)
F. To exit from this tax calculation misery, you sell all 38
shares of Agilent in December of 2006 for $1,222.39
You must calculate the long term capital gain on Agilent:
LTCG for Agilent = sale basis of A - cost basis of A
LTCG for Agilent = $1,222.39 - $1,130.7967
LTCG for Agilent = $91.5933
LTCG taxes must be paid on the $91.59 in tax year 2006.
G. To end the pain once and for all, you sell the 4 piddly shares
of Verigy in December 2006 for a total of $56.48.
You must calculate the long term capital loss on Verigy:
LTCL for Verigy = sale basis of VRGY - cost basis of VRGY
LTCL for Verigy = $56.48 - 59.6343
LTCL for Verigy = (-3.1543)
Long-term capital losses of -$3.15 exist in tax year 2006.
==================================================
Cash Received:
06/02/2000 = $11.45 (Cash for fractional share of A)
07/01/2001 = 5,307.87 (Sale of 200 HPQ)
10/31/2006 = 10.97 (Cash for fractional share of VRGY)
12/04/2006 = 56.48 (Sale of 4 VRGY)
12/07/2006 = 1,222.39 (Sale of 38 A)
----------------------
TOTAL RECD = 6,609.16
LESS COST = 5,475.40
NET GAIN $ 1,133.76
Reported as:
TAX YEAR 2000 = 7.03 (Gain on fractional share of A)
TAX YEAR 2001 = 1,037.06 (Gain on sale of HPQ)
TAX YEAR 2006 = 91.59 (Gain on sale of Agilent)
TAX YEAR 2006 = 3.15 (Loss on sale of Verigy)
----------------------
Total $ 1,132.53 (Gain over 8 years)
Gain = Principal * Rate * Time
Rate = Gain/Principal/Time
Rate = $1,132.53/$5,475.40/8 years
Rate = 0.0259 (before taxes)
Rate = 0.0259 x 80% (after taxes)
ANALYSIS:
Hewlett Packard was NOT a very good investment!
Gain ~ 3% before taxes
The gain wasn't even worth the tax calculation. :(
Gain ~ 2% after taxes
==================================================
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Susan Grossman on February 18, 2007, 3:30 am
Please log in for more thread options > TAX YEAR 2000 = 7.03 (Gain on fractional share of A)
> TAX YEAR 2001 = 1,037.06 (Gain on sale of HPQ)
> TAX YEAR 2006 = 91.59 (Gain on sale of Agilent)
> TAX YEAR 2006 = 3.15 (Loss on sale of Verigy)
> Total $ 1,132.53 (Gain over 8 years)
> Gain = Principal * Rate * Time
> Rate = Gain/Principal/Time
I was told via email that this was the WRONG calculation to
use for the gain and for the reports to the IRS so I post
this for the others who follow my calculation example for
THEIR stock to benefit.
Use the correct calculation for YOUR gain - do not use my
calculation above.
I don't know what forumula to use, but the emails to me said
that I was totally wrong in posting this formula for the
total gain so please ignore it.
I do think the tax calculation part was correct though but
it would be nice if someone confirms that before others use
it as a real-life example for their personal share-split tax
calculations.
Sue
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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