This is a general (and hopefully easier-to-answer) version of another question I asked.
Let's say I own 100 shares of public company X, that I purchased for $10 each long ago.
Then company X spins off 1 share of company Y for each 10 shares of company X, such that this is considered a taxable distribution, and the average share prices at the date of the distribution are $95 for company X, and $50 for company Y.
How would I calculate my updated cost basis in the two companies, and how would I calculate dividends/capital gains resulting from the distribution? And how would I know these calculations are correct? (namely, what information from the IRS would lead me to this conclusion?)
Is the following analysis correct?
This can be considered a dividend distribution.
- Before distribution: 100 shares company X, cost basis $1000
- Value of dividend at time of distribution: 10 shares company Y @ $50 each = $500
- After distribution:
- 100 shares company X, cost basis still $1000
- 10 shares company Y, cost basis $500
So I would have to report a dividend of $500, then if/when I sold company Y, that would also be my cost basis.
Sources: can't find IRS useful info, but these look relevant:
In partially or fully taxable spin-offs, stocks received would be reported as dividends to extent of taxable value when received. The basis of the stocks received would be the fair market value reported as taxable dividends.
http://ir.virtus.com/index.php?s=52 (PNX → VRTS spinoff which appears to be this same situation)
Q: What are the U.S. federal income tax consequences of the spin-off to PNX stockholders?
A: The spin-off is a taxable transaction for U.S. federal income tax purposes for the 2009 tax year. U.S. shareholders must include the fair market value of the Virtus shares received (including fractional shares for which shareholders receive cash) as dividend income in 2009. For individuals, subject to certain limitations, such dividend income will be taxable at a reduced rate of 15%. A non-U.S. shareholder is generally subject to withholding or applicable tax treaty rate, unless the shareholder can establish that it is entitled to a reduction or exemption from such tax.
Backup withholding taxes will apply if a shareholder has not provided the necessary certification or is not otherwise eligible for an exemption. The agent will sell shares otherwise allocable to certain shareholders to pay any backup withholding or other withholding taxes.
This summary does not discuss all tax considerations that may be relevant to stockholders in light of your particular circumstances, nor does it address any state, local or foreign tax consequences. You should consult your own tax advisor as to the particular consequences of the spin-off to you.