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Author: naj Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121592  
Subject: BCE & NT Tax Situation Date: 11/12/2000 4:58 PM
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I manage my mother's portfolio. She is a US citizen who held 480 shares of BCE when BCE spun off Nortel Networks (NT), so she now holds 1507 shares of NT (after the split).

It is my understanding, that as a US citizen, she will be taxed on the "dividend" of NT shares as if she received cash. If that is true, I have several questions I am hoping you can help me with.

1) What value will be put on the "NT dividend"? The value of the shares at the time of the "dividend", despite the fact that the shares have dropped in value quite a bit?

2) My mother is normally in the lowest tax bracket, but if NT counts as a cash dividend, she will show an income in excess of $100,000. That will really mess her up tax wise. It will change the amounts she needs to take any medical deduction, investment expense deduction etc. IF all that is true, I calculate she will need about $45,000 in cash to pay her 2000 taxes despite the fact she didn't receive one dime in cash. Am I correct?

3) Now for the really tricky part. She doesn't have that kind of cash. If I sell some stock most will trigger a gain since she/I am a long term investor. I could sell NT stock to pay the taxes but I hate to do that as I do think it is a good company and worth more than the going stock price. Any suggestions on how to raise the cash or deal with the IRS over this?

4) I could cash in some T-bills for part of the cash. Cashing in T-bills doesn't trigger any type of gain or loss; correct?

5) And how is the "dividend" different from the "tax basis" of NT? From the information I received before the spin off, it sounds to me like her tax basis in NT is a percentage of her tax basis in BCE, which is low because she held BCE for quite some time. How can the tax consequences be so different from the tax basis, or is it?

Thanks for any help you can offer; I'm desperate.
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Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41693 of 121592
Subject: Re: BCE & NT Tax Situation Date: 11/12/2000 6:33 PM
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Beware, I am out of my depth here. So don't believe anything I say. I don't think the spin-off is a true dividend. It's like when General Motors spun off Delphi (which is the spark plug and other parts manufacturer).[*] I own some NT (bought on its own, not as spin-off from BCE). Since I bought, NT has split twice. Once, they called it a split; once, a "dividend". I haven't sold, so I ain't talkin'. Before, I had x shares. Now, I have 4x, and my gain will be reported on Schedule D as a capital gain, whenever I sell. Since I haven't sold, no gain reported.

There may well be tax implications regarding Mom's residence (as opposed to her citizenship).

[*] When GM spun off Delphi, the price of GM immediately dropped 25% or something. However, the value of your Delphi was 25% of your previous GM shares. This demonstrated there was no dividend, not really.

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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41695 of 121592
Subject: Re: BCE & NT Tax Situation Date: 11/12/2000 7:34 PM
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I manage my mother's portfolio. She is a US citizen who held 480 shares of BCE when BCE spun off Nortel Networks (NT), so she now holds 1507 shares of NT (after the split).

It is my understanding, that as a US citizen, she will be taxed on the "dividend" of NT shares as if she received cash. If that is true...


I am no tax expert, and I really don't know what special facts might exist in this case, but generally, it seems to me, there is no tax due on shares that come from a split or a spin-off. Often, the originating company refers to the shares it distributes in a split as a "dividend" but it is not a dividend for tax purposes. Generally, to receive cash (even if the cash is re-invested in new shares, and you never really see it) is a taxable event. But it is my understanding that to receive shares in the way you describe is not a taxable event.

--SirTas (no tax expert!)

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41699 of 121592
Subject: Re: BCE & NT Tax Situation Date: 11/12/2000 9:49 PM
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I manage my mother's portfolio. She is a US citizen who held 480 shares of BCE when BCE spun off Nortel Networks (NT), so she now holds 1507 shares of NT (after the split).

It is my understanding, that as a US citizen, she will be taxed on the "dividend" of NT shares as if she received cash. If that is true, I have several questions I am hoping you can help me with.


That "understanding" does not fit with your [unquoted] item 5. If this was a tax-free spinoff, she would allocate her basis in BCE between BCE and NT and have no current income. This is what you indicated in item 5.

If this was a totally taxable distribution, she would have an unaffected basis in BCE and taxable income in the value of the NT shares when they were issued. That would also be her basis in the NT shares.

You need to find out the tax treatment of this spinoff. You might find the answer here on either the BCE or NT discussion board. (Type the ticker in the box at the bottom left of this screen.) If not, investor relations at either company should be able to help you. Without an answer to this question, your other questions are academic.

TMF ExRO
Phil Marti

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Author: naj Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41737 of 121592
Subject: Re: BCE & NT Tax Situation Date: 11/13/2000 7:02 PM
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I just copied this off Nortel's web site for investors. Thanks to all of you who responded to my original question, now help me interpet this. It sure sounds like my mother will be taxed as if she received cash AND taxed as if NT were valued today as it was in May. Comments please.

U.S. Shareholders:

A BCE shareholder that is a U.S. taxpayer will be required to treat this distribution as a taxable dividend according to U.S. tax laws. The dividend will be equal to the fair market value of the Nortel Networks common shares on May 1, 2000, the effective date of the Arrangement.

U.S. tax laws do not prescribe any specific method for determining fair market value, however, one acceptable alternative is to use the average high and low prices for Nortel Networks common shares on the effective date. Based on information from the New York Stock Exchange, the high and low for a whole Nortel Networks common share on May 1, 2000 were U.S.$120.25 and U.S.$114.50 per share respectively, before taking into account the Nortel Networks 2-for-1 stock split.

Your tax basis for Nortel Networks common shares will also equal this fair market value. No change should be made in the tax basis of your BCE shares.

It should be noted that the above discussion is not binding upon the United States Internal Revenue Service and shareholders (including shareholders who seek to utilize a date other than the effective date of the Arrangement or who have special facts) are urged to consult their own tax advisors.



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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41746 of 121592
Subject: Re: BCE & NT Tax Situation Date: 11/13/2000 9:56 PM
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I just copied this off Nortel's web site for investors. Thanks to all of you who responded to my original question, now help me interpet this. It sure sounds like my mother will be taxed as if she received cash AND taxed as if NT were valued today as it was in May. Comments please.

It definitely looks to me like this was a taxable distribution. Her BCE basis is unaffected, and her NT basis is the value when the shares were issued, which is also her taxable income from the distribution.

TMF ExRO
Phil Marti

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Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41751 of 121592
Subject: Re: BCE & NT Tax Situation Date: 11/14/2000 1:11 AM
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I don't think we need to haul Dobbin out of the stable on this, but here's a question that is hypothetical now, but may not be in the future.

Suppose Microsoft is broken into two equal parts, Microsoft and Nanosoft. Nanosoft's claim to fame will be that its products are even worse than Microsoft's are -- but I digress. So you had x shares of MSFT before at say 60, and now you have x shares each of MSFT and NSFT, each at 30. So, as TMFExRO thinks with BCE and NT, is that a taxable event with the spun off shares as a dividend, taxable at ordinary rates?

The difference in the two cases is that BCE and NT were two separately incorporated companies in Canada, though long before, NT as Northern Electric was a wholly owned subsidiary of the Bell Telephone Company of Canada and they manufactured the phones. (BCE is the new name for Bell Canada.) In my example, the division of MSFT and my imaginary NSFT would not be pre-existing.

By the way, if I recall correctly, BCE got some ruling or special dispensation from the Canadian Government that the distribution of NT shares to Canadian shareholders of BCE would not be a taxable event up there.

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41755 of 121592
Subject: Re: BCE & NT Tax Situation Date: 11/14/2000 6:58 AM
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Suppose Microsoft is broken into two equal parts, Microsoft and Nanosoft. Nanosoft's claim to fame will be that its products are even worse than Microsoft's are -- but I digress. So you had x shares of MSFT before at say 60, and now you have x shares each of MSFT and NSFT, each at 30. So, as TMFExRO thinks with BCE and NT, is that a taxable event with the spun off shares as a dividend, taxable at ordinary rates?

Neigh.

A breakup of MSFT would no doubt be structured as a tax-free event to shareholders, resulting in the allocation of basis that we usually see with a spinoff. The only reason I think this thread's spinoff is taxable is that the company said so. These things are determined on a company-by-company basis.

TMF ExRO
Phil Marti

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Author: naj Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41760 of 121592
Subject: Re: BCE & NT Tax Situation Date: 11/14/2000 10:42 AM
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Thanks again to all who have commented on my situation. And yes, Canadian stockholders did receive NT as a non-taxable dividend while US citizens got the short end.

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