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Financial Planning / Tax Strategies
|Subject: Re: Basis question||Date: 8/9/2012 3:44 PM|
|Author: ptheland||Number: 116521 of 121802|
I'm getting an early start on my 2012 taxes.
I'm sorry. Planning ahead is not allowed. You may not ask this question until April 13, 2013. ;-)
Way back in the heady days of 1998 I bought 200 shares of CBS.
In 2000, that turned into 217 shares of Viacom. There was no cash paid out at the time -- no cash-in-lieu, no partial dividends, no nothing. Just the 217 shares.
Good. Your basis in the 217 shares of Viacom is same as your basis in the 200 shares of CBS - namely your purchase price plus any commission or fees paid at the time of purchase. At this point, please DO NOT think in dollars per share. It's just a total number of dollars.
In 2006, Viacom split off new CBS shares , leaving me with 108 shares of CBS-B and 108 shares of Viacom. A few days later I got two cash-in-lieu payments, one for each of the new companies.
I sold both issues this year for a gain. I figure I'll split my original CBS cost based on the relative value of the two daughter companies. That is, if Viacom was worth $20 per share after the split and CBS was worth $10 per share after the split, I'll apportion 2/3 of the basis to Viacom and 1/3 of the basis to CBS. How I do it won't affect the bottom line, but I want to get it right on general principle.
Let's stop here. This is where the work is. As you correctly point out, the work is mostly irrelevant since you sold both of the split-up companies in the same tax year. But we'll carry on for the fun of it, and for the two lurkers who should have asked this question but didn't, and sold their shares in different tax years.
If you poke around the Viacom or CBS investor relations web sites, you'll probably find out the proper allocation of your cost between the two companies. That is the technically correct way to deal with your basis. However the basis is split, your check figure is that the total of the basis in the two companies is the same as your original basis before the split up.
Your allocation based on relative values is not correct. Only the companies involved can tell you the correct allocation in the spin off. Assuming the spin off is tax free (and there's a slim chance that it wasn't, so read the web sites carefully), the company will have to have requested tax-free treatment from the IRS. I believe part of that request would include the allocation of basis to the spun-off company.
Then there's the matter of the cash-in-lieu payments.
Yeah - about those. You did that wrong back in 2006. You should have first done the basis allocation from above. That would give you your basis in the 108-plus-a-fraction shares in each company. The cash in lieu is a sale of the fractional share. So you'd then need to allocate your total cost in the newly spun off companies to that fraction of a share that was sold. Of course, that leave you with a very slightly smaller basis in the whole shares.
Since I already paid taxes on that, I assume I can increase my basis in each stock by the amount of the cash-in-lieu.
As noted above, no.
Do I have that right?
Only to a point.
Now for the practical application, I'd just ignore the mistake in the fractional share reporting and claim the whole basis this year. If you are audited, it is possible the auditor would reduce your basis. And because 2006 is beyond the statute of limitations, you would not be able to amend that year to claim the basis there. In short, you'd get a small whipsaw.
I'd still recommend taking the whole basis however. You did over pay your taxes back in 2006, and you're making that up this year. While you have a bit of overall equity on your side, you don't have the letter of the law.
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