What is the correct way?

I think I have seen, on this board, the suggestion that you simply use a basis of zero on that fractional share, leaving the basis of your remaining whole shares very slightly inflated - perhaps by a few dollars. This is certainly the easiest thing to do.

But I don't think there's any justification for averaging costs - perhaps some of the resident experts will say otherwise. I think to be absolutely precise, you have to do the FIFO thing - that is, identify the earliest shares of T and proceed from there. I've been the victim of numerous spinoffs over the years, and that's what I've always done. In fact, I'm a long-time T shareholder, and have suffered through LU and NCR spinoffs and the 3:2 split in 1999, never mind the sale of a fractional share (when I stopped with the DRIP business) and the subsequent sale of part of my position - how I now wish I'd sold it all! In last week's spinoff, I wound up with a cash-in-lieu payment of $4.21 for 0.26 share of AWE. And via my spreadsheet, I worked out that:

0.54 shares of T, purchased on 5/1/97, basis $17.96, became
0.81 shares of T via 3:2 split on 4/15/99, basis still $17.96, and that generated
0.26 shares of AWE, basis $4.01 (since AWE inherits 22.33% of T basis)

And there you have it - FIFO basis is $4.01, so I have a capital gain of twenty cents. Fortunately, it's long term.