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Pawche  
#1 Posted : Wednesday, December 2, 2020 10:30:45 PM(UTC)
Pawche

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Investors and investment club treasurers often wonder how the cost basis of a parent company is allocated when there is a spinoff?

The cost basis of the parent company is split among the parent company and the daughter in proportion to each company’s Fair Market Value (FMV) to the combined FMV of both the parent and the daughter company. If company ABC is the parent company and XYZ is the daughter company, and we let A= FMV of company ABC, and B= FMV of company XYZ then the allocation of the parent’s pre-spinoff cost basis would be the following:

  • For company ABC the new basis would be [A/(A+B)] x (original parent company ABC cost basis).

    For company XYZ, the new basis would be [B/(A+B)] x (original parent company ABC cost basis).


If multiple tax lots are involved, this calculation is done for each tax lot.

Differences in reported cost basis between your records and your broker will result if your choice of FMV differs from your broker's choice. More details for how this happens and the common methods for determining FMV are discussed in the attached PDF document ( Spinoff Cost Basis.pdf (225kb) downloaded 2 time(s).). Examples of the three most commonly used methods using information from a recent spinoff are included. Sorry, the details are on a separate document but the table comparing the different methods did not display properly in the body of this post.

Russell Malley


Spinoff Cost Basis.pdf (225kb) downloaded 2 time(s).
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Edited by moderator Monday, April 8, 2024 12:01:29 PM(UTC)  | Reason: Not specified

thanks 2 users thanked Pawche for this useful post.
sean on 12/3/2020(UTC), gerlach on 4/4/2024(UTC)

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Pawche  
#2 Posted : Thursday, July 22, 2021 6:32:30 PM(UTC)
Pawche

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A customer recently wondered why their broker had assigned a cost basis of zero to the daughter company in a spinoff. This example prompted me to give an update on the basis allocation from a spinoff.

The general rules are in the tax code, specifically 26 US Code section 307. Part (a) of section 307 states the Secretary (of the Treasury) will set rules for basis allocation. These rules are in the Code of Federal Regulations (CFR) at 26 CFR 1.307-1. These are the rules normally applied to basis allocation in a spinoff and the ones I discussed in my previous post on this topic.

Part (b) of section 307 allows for a different process to allocate cost basis if a certain condition is met. If the FMV of a distribution (the daughter company) is 15% or less than the FMV of the parent company, then the recipient of the distribution can elect to have the normal part (a) rules of section 307 apply OR can elect to have the daughter company have a cost basis of zero and the parent company retain 100% of the cost basis.

The election to use part (a) or (b) of section 307 to determine cost basis is up to the taxpayer, not their broker.

Having a brokerage firm allocate zero cost basis to a daughter company in a spinoff is rare. This is the first example I have seen in about 15 years. I have never seen an IRS form 8737, which companies complete to give an example of cost basis allocation, use section 307(b) as an example of cost basis allocation.

Even though electing to use section 307(b) is rare, it is an option available to shareholders. If you decide to use a different method than what your broker used, I suggest you contact them and request their records match yours. Give them the results of your choice. If necessary, refer them to the tax code and regulations.

Remember, I am not an attorney nor a CPA so seek guidance from an appropriate professional if you have questions/concerns.

Russell Malley

Spinoff Cost Basis.pdf (225kb) downloaded 2 time(s).

Edited by moderator Monday, April 8, 2024 12:00:14 PM(UTC)  | Reason: Not specified

thanks 1 user thanked Pawche for this useful post.
gerlach on 4/4/2024(UTC)
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