In some reorganizations corporations
undergo stock split-ups. This is different
from a split-off because in a split-up the
stock of the corporation you previously owned
no longer exists--it is split into two (or more)
new companies. The original company is
liquidated when the two new companies
are issued. In comparison, in a split-off
the previous corporation continues in
existence.
The term split-up can be very confusing
because the news media often uses the term
loosely, referring to split-ups when they
mean stock splits, or spinoffs when they
mean split-ups or split-offs.
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The important thing that distinguishes these different forms of corporate reorganization is what happened to your ownership of the parent company stock. Did you still keep it (spinoff), did you exchange it but the parent company stock still exists (split-off), or did the parent company cease to exist (split-up.)
For cost basis purposes, split-ups are usually accounted for by one of two methods:
1. Carryover basis, or
2. Liquidation.
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Carryover Basis:
The usual cost basis accounting for split-ups
is that you carry over the cost basis you had
in the original "parent" stock to each of the
new companies you received in the split-up
in proportion to their relative market values
at the date of the split-up. Your holding
period in the new companies starts on the
day you acquired the original parent stock.
You always need to check the section of the
SEC filing for the split-up entitled "Material
U.S. Income Tax Consequences" to verify that
this treatment applies to your split-up.
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Liquidation:
If the specific IRS requirements for carryover basis treatment are not met under the terms of the reorganization transaction, the issuance of the two split-up stocks will be treated as a liquidation. This means that the fair market value of the two new stocks you received will be reported on your Form 1099-B as sales proceeds (even though you received no cash.) Your cost basis in the original stock is then deducted to arrive at your taxable capital gain. Your cost basis in the two new stocks then becomes the fair market value at the date of issuance (since that is the amount on which you were taxed), and your holding period for the new stocks begins at the date of issuance.
The specific IRS requirements for carryover basis versus liquidation treatment are determined at the corporate level and depend on factors such as:
1. Whether an active trade or business was conducted by each of the subsidiary
companies for the past five years.
2. Whether the transaction is being used to distribute earnings and profits of the previous
corporation. (The IRS wants profit distributions to be reported as dividends instead.)
3. Whether an active business is being operated in each of the new companies.
4. Whether the previous corporation owned 80% or more of each of the subsidiary
companies and distributed all the stock it owned.
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