Calculating Tax Basis for Spinoff Investments
The following describes, in general terms, a typical tax basis calculation for United States spinoffs. This was true to the best of our knowledge as of January 2015, but please be warned: we are not tax experts. We cannot and do not advise you. Tax treatment varies with circumstances. Laws change every year. Consult a tax accountant before acting on any information here.
Typically, in the United States, shareholders in distribution-type spinoffs are taxed on gains or losses in the tax year in which they sell the shares. To calculate tax basis in the spinoff and parent, the shareholder must allocate his basis in the purchase of shares in the original company pro rata across the two resulting companies, based on the relative fair market values of the parent and spinoff immediately after the separation.
For example, suppose you buy one share of Company A at $100; A spins off Company B; and each share of A receives a distribution of 4 shares of B. Immediately after the spin, suppose the fair market value is $80 for A shares and $10 for B shares. The total market value of your holding is now $120 (one A at $80, and four B’s at $10). So your allocated basis in A would be 100*80/120, or $66.67; your basis in B would be 100*40/120, which is $33.33 for the four B shares, or $8.33 per B share.
The above paragraph evades the question of how to determine fair market value immediately after the spinoff. Turns out the IRS does not explicitly answer this question either. Your accountant can answer it, or you can refer to the investor relations pages of the parent and spinoff companies. The latter can be very helpful sources of information on this. They often offer specific fair market values for the two entities, which you can then use to allocate basis. For example, here are the tax basis allocation guidance pages from various recent spinoff transactions.
- McDermott International and Babcock & Wilcox
- Verizon landline transfer to Fairpoint
- CoreLogic and First American Financial
These three all follow the pattern described above, but again, circumstances vary. Not every US spinoff is taxed this way. Outside the US, rules differ even more. This is background, not advice. Consult your accountant.