Reading questions submitted by other users often helps you understand your own cost basis situation. Listed below are some problems which we have solved for readers.
Question from investor in American Express:
First, what a wonderful resource your website is and so easy to use. Thank you!
My question is mathematical regarding stock spinoffs. You show a factor of .1247 for the percent of cost allocation to Ameriprise-AMP spinoff stock and .8753 as the percent of cost allocation to original stock (American Express-AXP). Where did you get the .1247 figure? How is that calculated? We were given .2 share for each share of AXP we owned, giving us 20 shares of AMP in addition to the 100 shares of AXP. Answer: The spinoff ratio was 20% (.2 shares of AMP issued for each share of AXP.) The .1247 is the ratio of the market values of the spinoff stock and the original stock on the first day of trading as separate entities. The IRS requires that the cost basis be allocated in the same proportion as the respective market values. The opening price, average price, closing price, or trade-weighted average price can be used. Here is a Charles Schwab link that references the cost allocation factor: https://schwabpt.com/downloads/docs/resources/actions/library/AXP-AMP_30Sept05_Spinoffv2.pdf
Schwab used the closing prices on the first trading day after the spinoff was issued to calculate the cost allocation: AXP $50.28 AMP $35.80 $35.80 x .2 shares = $7.16 equivalent market value for .2 AMP shares received $7.16 plus $50.28 = $57.44 combined market value for 1 AXP and .2 AMP shares $7.16 divided by $57.44 = .1247 or 12.47% of AXP cost basis allocated to AMP shares
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Question regarding previous errors: I see from your website that I did it wrong in the past and did not allocate cost to a spinoff stock which I already sold four years ago. What can I do now? Can I keep my original cost basis for the original stock?
Answer: Unfortunately, your previous error was made four years ago, so the three-year time period for filing amended tax returns has passed. Each tax year stands on its own. Even if you did not claim the proper basis for the spinoff stock, you must still adjust the basis of the original stock according to the spinoff allocation factors. ******************************************************************************************************
Question from investor in Digimarc: Please add the recent Digimarc merger to your calculator function. Would the merger be considered a cash to boot? This is what happened in my account - it wasn't clearly an all cash deal.
I started with 1,500 shares of Digimarc and they were tendered (sold) for $18,375 on 08/06/2008 ($12.25 per share.) Also added to my account was an additional $3,240 in cash and an additional 428 shares of Digimarc (new) common stock.
I received a corporate distribution valuation information form that indicated 1 share of new Digimarc common stock was given for every three and a half (3.5) shares of the old Digimarc common stock (resulting in 428 shares). The letter continued giving a fair market value of this stock to be the difference of the old Digimarc common stock on the date of the spin-off 08/06/08 ($14.41) and the value paid for the shares of $12.25 per share. Thus the fair market value was $2.16 x 3.5 for a value of $7.56. Is "fair market value" synonymous with cost basis?
The cash was the difference between the closing price of Digimarc ($14.41) on August 1 and the value paid for the common shares ($12.25) paid on the 1,500 original shares ($3,240).
Let me know which one of your website's calculators will provide me with the correct tax basis. I was going to add the cash to the $18,375 received for the 1500 shares as my gross proceeds reconciling this with my original purchase price to come up with the cost basis for the 1500 shares and use the "fair market value" number provided by Digimarc as my cost basis for the 428 shares.
1. I sold the 428.570 shares received in the spinoff. 2. My broker spells out dividends received on my 1099 - I received no dividends from Digimarc, or DMRC. 3. Listed Under Proceeds from Broker Transactions on my 1099: 08/06/2008 Taxable exchange FMV 1,500 Digimarc merger eff 09/2008 net proceeds $3,240.00 08/06/2008 Tender 1,500 Digimarc merger eff 09/2008 net proceeds $18,375.00 11/12/2008 Sell 428 Digimarc New net proceeds $4,074.00
On the gain/loss schedule from my broker: The cost basis for my 1,500 shares is listed next to the $18,375 sales proceeds. The 428 shares are listed with a purchase date of 12/31/1999? and a sold date of 11/12/2008 for $4,074. The additional .570 shares finally is listed as .57 Digimarc Corp New, cash in lieu, purchase date 12/31/1999?, sold date 10/16/2008 for $5.51.
Answer: Aha! It all becomes clear! This was definitely not a "cash to boot" merger. Digimarc Corp stock was purchased by L-1 Identity Solutions for $12.25 per share in an all cash deal tender offer on 8/13/2008, so it is a straight sale when you tendered your shares. No L-1 Identity Solutions stock was exchanged, so it was not a stock merger with cash to boot.
The spinoff of new Digimarc shares (the digital watermarking business line) was taxable according to the Form 8-K, in which case you would have additional basis beyond your original purchase price. There should have been a taxable dividend included on your Form 1099 dividend income report for 2008.
There are actually four separate transactions going on here: 1. Tender of 1,500 old Digimarc for sales proceeds of $18,375.00. Straight sale, no cash to boot or anything. Report $18,375.00 in column (d) of Schedule D on your Form 1040 U.S. Individual Income Tax Return. Report your actual purchase price for 1,500 shares of Digimarc as your cost basis, adjusted for any previous spinoffs, splits, or reorganizations. Date of sale is 8/6/2008. Acquisition date is date of purchase of your 1,500 shares.
2. Taxable spinoff of 428.571429 shares in new Digimarc with fair market value of $3,240.00. Technically, I think this should be reported as a dividend rather than sales proceeds, but it is still taxable income either way. This would be reported as $3,240.00 in column (d) of Schedule D with a cost basis of zero. The date acquired (for column b) for a taxable spinoff is the date of the spinoff, 8/6/2008. List the sale date as 8/6/2008, also, even though you did not sell it yet. This is how you report the taxable income on Schedule D, since the brokerage firm declared it as sales proceeds rather than dividend income. You want your Schedule D total sales proceeds to agree to your broker's Form 1099-B report to avoid raising red flags with the IRS.
3. Sale of .571429 fractional shares for cash in lieu of $5.51. You now have cost basis in the fractional share because of transaction #2 above. Now you declare $5.51 in sales proceeds in column (d) of Schedule D and enter $4.32 as your cost basis. The acquisition date is 8/6/2008. The sale date is 10/16/2008. The $4.32 is arrived at as follows: .571429 divided by 428.571429 times $3,240.00.
4. The sale of 428 shares of new Digimarc on 11/12/2008 for $4,074.00. You report $4,074.00 in col (d) of Schedule D as sales proceeds. You have cost basis in these shares from transaction #2 above. Your cost basis is $3,240.00 less the $4.32 fractional share basis, so you report $3,235.68 in column e of Schedule D. Your acquisition date is 8/6/2008. The sale date is 11/12/2008. This is a straight sale for cash.
Finally, to answer your question: No, fair market value is not synonymous with cost basis. However, in this particular case your cost basis for the 428.571429 shares is the fair market value because it is a taxable spinoff. This is generally not the case for spinoffs, however, which are usually non-taxable.
This one was a challenge! We can see why you were confused.
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