Cost basis allocation question: GM bonds conversion to stock & warrants

Question

So back when the 2008-2009 financial crisis was in full swing, I bought some GM bonds at depressed prices. These have now been converted to stock and warrants in the new GM company; a while back I asked another question about how to calculate the conversion ratio, and I thought I was done with the accounting hell.

I sold some of my new GM stock in 2011, and now I have to figure out cost basis (or at least estimate it and double-check what my broker reports). Ugh.

Why ugh? Well, I know my total cost basis in the XGM bonds I bought. But my present ownership in GM falls into 4 pieces (again, see previous question):

• shares of GM
• warrants GM/WS/A (CUSIP 37045V118) -- warrants @ $10.00 expiring 7/10/2016
• warrants GM/WS/B (CUSIP 37045V126) -- warrants @ $18.33 expiring 7/10/2019
• magic elves from Motors Liquidation who are still distributing very small pieces of the above three items every quarter for a while.

Usually with an event like this, the company issues a press release for its investors telling us our cost basis allocation for each division of capital. But all GM says is the following:

Are the warrants currently exercisable and/or tradable?

Both Warrant A, expiring July 10, 2016 with CUSIP 37045V118, and Warrant B, expiring July 10, 2019 with CUSIP 37045V126, are currently exercisable and tradable. As of April 25, 2011, the exercise price for Warrant A expiring July 10, 2016 (CUSIP 37045V118) is $10 and the exercise price for the warrant B expiring July 10, 2019 (CUSIP 37045V126) is $18.33. Strike prices may change due to certain events, such as a stock dividend or stock split. There are no restrictions on shares of common stock post exercise.

...

What is my cost basis for the warrants and common stock I received from the MLC bankruptcy?

The receipt of new GM stock and warrants by Motors Liquidation Company (MLC) bondholders was generally not a taxable event. Your historic cost basis in your Motors Liquidation Company debt is your basis in the GM stock and warrants received. The basis should be spread to the assets received pro rata based on value. [jms: my emphasis] You may want to seek the advice of a tax advisor and or your financial advisor for assistance in determining your cost basis and allocation between the various assets received, or if you received additional assets from MLC.

Gee, thanks GM, that really clears up the situation.

The only other document I could find is this distribution chart for Motors Liquidation Company. My bonds were XGM 7.25% 7/41 = CUSIP 370442774, so it says 0.095935 stock, 0.087214 A Warrants, and 0.087214 B warrants per unit outstanding, but that only helps me know how much of each class I should have received, which I already know -- and not how to compute the cost basis allocation.

Could anyone else tell me where to look to find out how to allocate my cost basis in GM shares and warrants? (e.g. is it 50%/25%/25% or 40%/30%/30% or what ?)

Answer 1

This is a bit complicated because of all the moving parts, but is a little simpler because the two warrants are now publicly traded. The main rule appears to be that your cost should be apportioned into the bases for the pieces you received by the proportions of the prices established in the market on the first day of trading in which they trade separately (source: costbasis.com). Since the A and B GM warrants began trading in March 2011 (at least that's what a quick search shows), use their prices and the GM price on the same day to establish the proportions. You also must include the factor of how much of each piece you received for each of your bonds.

So, for example, if the prices of GM, WSA, and WSB, were $32, $23, and $17 on the first day of trading, and you got 3 shares GM, 2 A warrants, and 1 B warrant for your bonds, their worth on first day of separate trading would be:

w(GM)  = 3*32 = 96
w(WSA) = 2*23 = 46
w(WSB) = 1*17 = 17
total          159

and so the proportion of your bond cost to be allocated to your A warrants, for instance, would be 46/159 or about 28.9% using these example figures.

The small dribbles of additional securities you have received already, I would include in the calculation above, and if you in the future receive any further dribbles, I would assign them a basis of $0 (as your full bond cost would have already been completely allocated).

Answer 2

I found additional evidence on TDAmeritrade's website that helps confirm that the 3/17/11 prices Jason found are the ones to use since all three were traded on that day. Although GM+A had prices and trading as early as 2/28/11, GM+B's price and trading shows up no earlier than 3/14/11, but there was no trading indicated for GM+A on 3/14 so 3/14 can't be used. The two warrants were not traded every day after they came out. The next date that I found when all three, GM, GM+A and GM+B had trades was 4/11/11. I found Google and Yahoo Finance unable to produce the historical prices for the warrants that far back. Unfortunately, you need to be a TDA accountholder in order to access TDA's historical price information for stocks.

Answer 3

Because the distribution date was APR 21, 2011, THAT should be the correct date for ascertainng the stock prices of the GM stock and warrants. The subsequent distributions after April should also be allocated in accordance with their distribution dates, with tax basis being reduced from the original APR 21st date's allocations, and reallocated to those subsequent distributions, taking into account any interim sales you might have made.

Answer 4

Your final tax basis could not be determined until June 14, 2012, the first day of separate trading of all four securities that you received from the GM bankruptcy reorganization.