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You're not going to want to hear this, but the "correct" way to calculate your AWE basis is to consider each lot of T you purchased (including dividend reinvestments) separately. You will have to calculate the number of fractional shares of AWE spun off from each purchase and the corresponding cost basis for each of the lots. You can then total the number of shares and the total basis.

Well, ok - but it's entirely equivalent to calculate the number of shares of AWE received, and their basis, from the total number of shares of T that you have, and their total basis. It's only when you have a sale that you have to start messing around with separate lots. Consider this example, using a fictional company X:

lot 1: buy 100 shares of X, basis $1000
lot 2: buy 200 shares of X, basis $2500
lot 3: buy 250 shares of X, basis $2800

In all, you have 550 shares of X, and your total basis is $6300

Ok, now suppose that X spins off Y as follows: for each share of X that you own, you receive .316 shares of Y. The basis adjustment is 25% to Y, 75% to X.

Doing the lots separately,

lot1 -> 31.60 shares of Y, basis $250
lot2 -> 63.20 shares of Y, basis $625
lot3 -> 79.00 shares of Y, basis $700

Adding these together, you now have 173.80 shares of Y, with a total basis of $1575. And you'll get the same numbers if you pretend that you have a single lot of 550 shares, with a basis of $6300.

The original question was, "what's the basis of that fractional share?" In this case, Y will issue 173 whole shares, and pay you cash-in-lieu for the fractional (0.80) share. Where did that share come from? Using the FIFO rule, it came from that first lot of 31.60 shares of Y. Those shares have a basis of $7.91/share ($250/31.60 shares), so the basis of your 0.80 cash-in-lieu is $6.33 ($7.91 x 0.80). And now here's the messy bit, and the reason that DRIPs are so damn tedious: forever after, you have to keep track of the fact that you've used up $6.33 of the original Y basis of $1575. That is, the basis of your 173 whole shares of Y is $1568.67. If you subsequently decide to sell 100 share of Y, here's where they come from: 30.80 shares from lot 1 (remember, you've already sold 0.80 shares of that lot); 63.20 shares of lot 2; and 6.00 shares from lot 3. I'll let you do the basis. Hey, this is why spreadsheets are so useful!

This is the strongest argument I know of against DRP plans -- the bookkeeping is exceptionally burdensome.

I agree, and this is why I abandoned DRIPs several years ago - the bookkeeping became just too onerous. I now own whole shares only, and just take the dividends in cash. (Though to be perfectly honest, all those fractional shares are not a problem if you sell off your entire position. It's a partial sale - which, after all, is what you get with a cash-in-lieu for a fractional share - that's such a pain in the neck.)

Lorenzo2
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