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Author: SHenrie Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: GM and RTHa Shares: Cost Basis Date: 12/20/1997 8:10 PM
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I am a little confused as to how to calculate the cost basis of the RTHa shares I have been given by GM as a result of the spin-off of Hughes.

Hypothetically: Say I made the following purchases of GM stock:

6/24/96   50 Shares @ 50    Cost: $2,500
9/10/96   10 Shares @ 40    Cost: $  400
12/11/96  20 Shares @ 30    Cost: $  600
3/11/97    5 Shares @ 45    Cost: $  225
6/11/97   15 Shares @ 35    Cost: $  525
9/11/97   25 Shares @ 25    Cost: $  625

And now have 125 Shares with a total cost basis of 
$ 4,875. I am issued 310 shares of Raytheon Class A stock on 12/18/97, tax-free. (GM gives me .06377 shares of Raytheon Class A shares for each share of GM I own.)(The reamaining .87875 fraction of a share is to be issued to me later in cash.)

My questions are:
1. What is the cost basis of the 310 Raytheon Class A Shares?
2. Do I need divide the 310 into six lots, each with a different cost basis per share, to match the six purchases of GM I made; in order to segregate short from medium from long term gains?
3. If so, how's the math done?

-- SHenrie
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Author: mkunka Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 961 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/20/1997 9:34 PM
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From my own humble understanding of the tax laws
and experience in the MSTR-SZA merger this year:

Since you started with 6 lots, each with their own
cost basis, you will still have 6 lots, each with the same cost basis as the original lots.
Just use the exchange ratio to determine the number of shares in each new lot. If you receive fractional shares in cash instead of stock, they come from the first lot (based on FIFO).

Here is my experience from the MSTR-SZA merger:

a) 160 shares MSTR at 26 1/2 + 12 commisions + 501.47 from a previous wash-sale-rule = 4753.47 cost basis

b) 130 shares MSTR at 40 1/8 + 12 commisions = 5228.25 cost basis

1 MSTR = 0.85 SZA merger-deal exchange ratio

a) 160 MSTR = 136 SZA with cost basis = 4753.47
b) 130 MSTR = 110.5 SZA with cost basis = 5228.25

Total = 246.5 SZA shares

but there is a 0.5 SZA fractional share that was issued as cash not stock, so it is a realized gain from the first lot (FIFO), even though the second lot is what generated the fractional share.

a) 136 SZA == 135.5 SZA with cost basis = (135.5/136)*4753.47 = 4735.99
plus 0.5 SZA with cost basis = (0.5/136)*4753.47 = 17.48

b) 110.5 SZA with cost basis = 5228.25

cash received for 0.5 SZA = 29.13,
so capital gain = 29.13 - 17.48 = 11.65.

Whether or not the capital gain is a short or long term gain depends on how long you held the first lot (since that is where the fractional share is taken from).

Also, since you can't sell fractional shares, if I wanted to sell 150 SZA on a FIFO basis the first 135.5 would be from the first lot, the last 14.5 would be from the second lot. (Therefore, some lot mixing is inevitable.)

You should definitely check the IRS web site to find the publications related to this matter (I think it is Tax-free exchanges of property &/or Basis of property)
That should point you in the right direction in case I have misinterpreted the tax laws.

Good Luck!


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Author: KATinChicagoland Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 967 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/21/1997 12:55 PM
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<<I am a little confused as to how to calculate the cost basis of the RTHa shares I have been given by GM as a result of the spin-off of Hughes.

[snip]

My questions are:
1. What is the cost basis of the 310 Raytheon Class A Shares?>>

You will receive guidance on this from GM. Assuming this is a tax-free spin-off, your basis in your old shares will be allocated between old and new based on the relative fair market values at the time of the spin-off. For example, if the Raytheon shares you receive have a FMV equal to 8% of the total, and GM shares have a FMV equal to 92%, then for each lot of shares you will allocate the basis 92% to the GM shares you retain and 8% to the Raytheon shares you received.

<<2. Do I need divide the 310 into six lots, each with a different cost basis per share, to match the six purchases of GM I made; in order to segregate short from medium from long term gains?>>

Yes, you do this not only to segregate long-term from short-term, but also to segregate lots that have different basis per share.

<<3. If so, how's the math done?>>

Suppose 8% is the right number for relative value of the Raytheon shares. For each lot of shares, do the following:

Multiply your total basis in the lot by 92%. This is the basis you now have in your GM shares in that lot. Divide by the number of GM shares to get your basis per share.

The remaining 8% is your basis in the Raytheon shares that relate to that lot. That number of shares is the number of GM shares times .06377. To get the basis per share of the Raytheon shares in this lot, divide the total basis of those shares (8% of the original basis of the GM shares in the los) by the number of Raytheon shares.

This ignores the cash you received for the fractional share. I believe there's a special rule allowing you to treat this as a dividend to avoid complicated sale calculations, but that's dredged up from old memory.

KAT in Chicagoland

-- SHenrie


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Author: SHenrie Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 969 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/21/1997 6:12 PM
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mkunka:

Thanks very much! Your message was a great help to me.

You don't heppen to know the publication # of the IRS pub., "Tax-free exchanges of property &/or Basis of property" that you refer to in your message.

Yours, SHenrie

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Author: SHenrie Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 970 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/21/1997 6:21 PM
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KATinChicagoland:

Thanks for your message ... it really helped.

On more question:

You wrote:
"You will receive guidance on this from GM. Assuming this is a tax-free spin-off, your basis in your old shares will be allocated between old and new based on the relative fair market values at the time of the spin-off. For example, if the Raytheon shares you receive have a FMV equal to 8% of the total, and GM shares have a FMV equal to 92%, then for each lot of shares you will allocate the basis 92% to the GM shares you retain and 8% to the Raytheon shares you received."
Do I need to calculate the FMV based on the Friday 12/19/97 closing prices of GM and RTNa or will GM tell me when they send me info. on the transaction?

Yours, SHenrie


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 975 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/21/1997 9:25 PM
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<<I am a little confused as to how to calculate the cost basis of the RTHa shares I have been given by GM as a result of the spin-off of Hughes.>>

KAT gave you the right on answer. I'm sure that you have read it by now, but if not you really need to check it out.

Nothing really for me to add.

TMF Taxes
Roy



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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 977 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/21/1997 9:38 PM
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<<You don't heppen to know the publication # of the IRS pub., "Tax-free exchanges of property &/or
Basis of property" that you refer to in your message.>>

While KAT provided the original response, I doubt that he will mind if I provide the information that you are asking for.

For the Tax Free Exchange information, check out IRS Publication 544. Regarding the basis information, there are a few that you might want to check out. Stocks are discussed in Pub 550. You might also want to check out Pub 551 (general basis information).

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 978 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/21/1997 9:38 PM
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<<You don't heppen to know the publication # of the IRS pub., "Tax-free exchanges of property &/or
Basis of property" that you refer to in your message.>>

While KAT provided the original response, I doubt that he will mind if I provide the information that you are asking for.

For the Tax Free Exchange information, check out IRS Publication 544. Regarding the basis information, there are a few that you might want to check out. Stocks are discussed in Pub 550. You might also want to check out Pub 551 (general basis information).

TMF Taxes
Roy

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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 979 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/21/1997 10:14 PM
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<<<I am a little confused as to how to calculate the cost basis of the RTHa shares I have been given by GM as a result of the spin-off of Hughes.

[snip]

My questions are:
1. What is the cost basis of the 310 Raytheon Class A Shares?>>

You will receive guidance on this from GM. Assuming this is a tax-free spin-off, your basis in your old shares will be allocated between old and new based on the relative fair market values at the time of the spin-off. For example, if the Raytheon shares you receive have a FMV equal to 8% of the total, and GM shares have a FMV equal to 92%, then for each lot of shares you will allocate the basis 92% to the GM shares you retain and 8% to the Raytheon shares you received.

<<2. Do I need divide the 310 into six lots, each with a different cost basis per share, to match the six purchases of GM I made; in order to segregate short from medium from long term gains?>>

Yes, you do this not only to segregate long-term from short-term, but also to segregate lots that have different basis per share.

<<3. If so, how's the math done?>>>

Ooooh! I am SO GLAD my T was in my IRA and that my GM is in the IRA, too. 8-) I need not figure any of this out. 8-)

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Author: SHenrie Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 980 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/22/1997 9:48 AM
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TMF Taxes:

>>Thanks. I don't what I'd do without you and the other Fools. You guys are the best educational resource out there.<<

Does your message mean that KAT is right about the how the fractional share is treated, i.e. as a cash dividend, and that MKUNKA was wrong that the fractional share will be treated as a sale of part of the first lot of RNTa?

Related Questions: Do I divide 310 shares, or 310.87875 shares proportionally into 6 lots?

Think carefully, SHenrie

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Author: mikeraz Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 983 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/22/1997 4:46 PM
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To make sure that I fully understand this...

The GM share new basis equals:


1 - ( cash value of distribution / Thursday GM Close ) * Previous Basis Value

OR

1 - ( 3.59 / 63.56 ) * Previous Basis Value

OR

.9435 * Previous Basis Value

Is that right? How do I need to keep the record of all this for eventual tax purposes? Should I expect my broker to handle that in their tax statements to me?

$3.59 / GM Friday close * Actual Basis

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 984 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/22/1997 6:56 PM
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<<Does your message mean that KAT is right about the how the fractional share is treated, i.e. as a
cash dividend, and that MKUNKA was wrong that the fractional share will be treated as a sale of
part of the first lot of RNTa?>>

Not necessarily. I've seen it reported BOTH ways. The answer will really depend upon what document that you receive from the company for your fractional shares. If you receive Form 1099B, the company will treat it as a sale. If you receive 1099DIV, you'll treat it as a dividend. If I had to guess, I'd guess that you'll receive a 1099B, and will have to treat the partial shares as a sale.

<< Related Questions: Do I divide 310 shares, or 310.87875 shares proportionally into 6 lots?>>

No, I don't think so. You simply take the 310 shares and treat them as 6 individual purchases...that is what you did..right? Or am I missing something. Once you receive guidance from the company, this whole thing may fall into place for you. But you certainly have to keep your separately purchased "lots" separated.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 985 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/22/1997 6:56 PM
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<<Does your message mean that KAT is right about the how the fractional share is treated, i.e. as a
cash dividend, and that MKUNKA was wrong that the fractional share will be treated as a sale of
part of the first lot of RNTa?>>

Not necessarily. I've seen it reported BOTH ways. The answer will really depend upon what document that you receive from the company for your fractional shares. If you receive Form 1099B, the company will treat it as a sale. If you receive 1099DIV, you'll treat it as a dividend. If I had to guess, I'd guess that you'll receive a 1099B, and will have to treat the partial shares as a sale.

<< Related Questions: Do I divide 310 shares, or 310.87875 shares proportionally into 6 lots?>>

No, I don't think so. You simply take the 310 shares and treat them as 6 individual purchases...that is what you did..right? Or am I missing something. Once you receive guidance from the company, this whole thing may fall into place for you. But you certainly have to keep your separately purchased "lots" separated.

TMF Taxes
Roy

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Author: KATinChicagoland Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 989 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 12/22/1997 11:39 PM
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<<Does your message mean that KAT is right about the how the fractional share is treated, i.e. as a cash dividend, and that MKUNKA was wrong that the fractional share will be treated as a sale of part of the first lot of RNTa?>>

I didn't say the fractional share is treated as a dividend, but only that I thought in the mists of time there was a rule under which you could ELECT to treat it that way if you thought that would simplify things. But I can't lay my hands on that rule, so either I made it up or the rule went away. I'm virtually certain the cash in lieu of fractional share will be treated as a sale. In theory it can be a dividend, but (for technical reasons I won't go into here) the circumstances for dividend treatment are not present. Anyone who wants details should read Rev. Rul. 66-365.

<<Related Questions: Do I divide 310 shares, or 310.87875 shares proportionally into 6 lots?>>

A perceptive question. The answer is 310.87875. (Roy said 310, but I'm guessing he misinterpreted your question and will agree with me when he reviews your original message). You are treated as if you received 310.87875 shares and sold the fraction, so of course you must allocate some basis to the fraction to determine your gain on that deemed sale. And the fraction is part of what you received for the six lots, so you are allocating the total 310.87875 over the six lots. As I believe someone pointed out, you are deemed to have sold .87875 shares out of the first lot.

To answer one more question, I believe GM will provide precise data to its shareholders concerning the basis allocation. Calculations you perform based on the closing price on the day of the transaction may not match the figures they use, although they should be quite close.

All this is more trouble than really necessary given that the tax involved is no more than pocket change, but it's fun (to me at least) to track these questions down to their precise answers.

KAT in Chicagoland

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Author: xtiesue Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3275 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 4/5/1998 10:38 PM
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Okay... I'm confused again. I have a 1099B for the sale of Raytheon fractional shares from the GMH shares I held before the transactions, and a 1099B for the sale of Raytheon fractional shares from the GM 1 2/3 shares.

I keep seeing "tax free" in relation to the transaction. But here I am reading that I do have to pay taxes on the money I received for the fractional shares. After the dust settled, which ended up being true?

Thanks.

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Author: synchronicity Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3278 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 4/6/1998 12:46 AM
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<<Okay... I'm confused again. I have a 1099B for the sale of Raytheon fractional shares from the GMH shares I held before the transactions, and a 1099B for the sale of Raytheon fractional shares from the GM 1 2/3 shares. I keep seeing "tax free" in relation to the transaction. But here I am reading that I do have to pay taxes on the money I received for the fractional shares. After the dust settled, which ended up being true?>>

Although the transaction in general was "tax-free" (you didn't get taxed on all the Raytheon shares you received), you can not receive a "fractional share" of Raytheon stock. So, instead of getting (for example) 6.38 shares of Raytheon, you get 6 shares of Raytheon and $20 "cash for fractional share". For tax purposes, you are considered to have sold your fractional share and received cash. The capital gain (or loss) on that "sale" should be minimal.

If you want more info, the Daily Dow discussed this on January 19th or so. You can also check a post I made in the "Dow Dividend Approach/Foolish 4" folder on April 1.

Hope that helps,

-synchronicity

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3287 of 121114
Subject: Re: GM and RTHa Shares: Cost Basis Date: 4/6/1998 9:52 AM
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[[Okay... I'm confused again. I have a 1099B for the sale of Raytheon fractional shares from the
GMH shares I held before the transactions, and a 1099B for the sale of Raytheon fractional shares
from the GM 1 2/3 shares.

I keep seeing "tax free" in relation to the transaction. But here I am reading that I do have to pay
taxes on the money I received for the fractional shares. After the dust settled, which ended up being
true?]]

The "tax free" that you are reading about has to do with the MAIN shares. You don't have a tax even on the conversion/spin off/split up of the original shares to the new Raytheon shares. So the largest portion of the transaction is certainly tax free (unless you only owned a very few shares).

But, the fractional shares issue is certainly taxable.
You have actually made a stock sale of a small portion of the shares, and the basis must be spread, and the gain/loss reported.

TMF Taxes
Roy

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