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A company whose stock I hold spun off another company in 2006. The parent company announced that to figure out the cost basis of the new shares, shareholders should take the cost basis before the split, and allocate it to the two new holdings proportionately by fair market value.

Easy enough. The problem is that in this case, the new company didn't start trading until about 14 days after the spin-off -- the spin-off was on the 14th of the month, and the new company didn't start trading until the 28th. So no market value data is available until the 28th.

So which two fair market values should I use? It seems like I should use the same day, if possible, but if I choose the 28th, arguably the FMV of the parent company changed.

Maybe the question is how to calculate FMV of a security that doesn't trade, trades irregularly, or has a gap in trading.

The truth is that this won't make much of a difference in my taxes (the stock didn't move much during this 14 days), but I'd like to fall back on some kind of policy or rule rather than picking something arbitrarily, if possible.

TIA

Randy
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Easy enough. The problem is that in this case, the new company didn't start trading until about 14 days after the spin-off -- the spin-off was on the 14th of the month, and the new company didn't start trading until the 28th. So no market value data is available until the 28th.

Did the parent company's stock show a big drop in price - reflecting the spin off - on the 14th or the 28th?

If the price drop happened on the 28th, I'd use that date for the FMV calculations. If it happened earlier, presumably on the 14th, then I'd be tempted to say you need to come up with a value on that date.

Care to share the name of the companies involved? Perhaps another set of eyes on the info they provide could help.

--Peter
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Did the parent company's stock show a big drop in price - reflecting the spin off - on the 14th or the 28th?

From the closing price on the 13th to the open on the 14th, it dropped about 2%. From closing price to closing price, it dropped 3.7%. Meanwhile the new security eventually hit the market at about 7.2% of the parent company's price (and it was a 1:1 distribution). So the parent company's stock dropped by something like 30-50% the market price of the new stock on the 14th. It didn't really move on the 28th, which is when the new stock started trading.

If it happened earlier, presumably on the 14th, then I'd be tempted to say you need to come up with a value on that date.

What would I do in this case? The only thing I can think of is to take the first available market price, which was on the 28th. For stocks that don't trade every day, you can interpolate or take an average. But in this case there is no prior trading history.


T
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What would I do in this case? The only thing I can think of is to take the first available market price, which was on the 28th. For stocks that don't trade every day, you can interpolate or take an average. But in this case there is no prior trading history.

i'm not that familiar with tax accounting (so maybe somebody who is can weight in) but i have looked somewhat closely at GAAP rules governing the determination of "fair market value". presumably the tax rules are fairly similar in regards to these fundamental concepts.

despite the name, it is not the case that "fair market value" must only be determined by market prices; that's just considered the highest & best authority. sometimes these prices aren't available.

if you need to determine FMV an asset as of a certain date, and there are no readily quoted market prices available from independent 3rd parties, then you have to use other valuation methods, e.g. appraisal.

if you can find a comparable, you can infer valuation multiples (P/E, P/B, yield, etc.) & apply them to your case.

trp
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What would I do in this case?

First, I'd reread the info provided by the companies involved (which, BTW, you haven't mentioned). It is possible that, with the transaction behind them, they calculated up a percentage of your basis to apply to the spun-off stock.

Given the info you've provided, I think the 14th is the correct day to compare the FMV of the two newly separated stocks. But since one didn't trade for another two weeks, it's FMV is subject to some debate.

I'd just use your best estimate and move on. Unless this holding is very significant to your net worth, the differences between reasonable estimates of FMV are likely not material.



--Peter
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