AT&T Spinoff cost basis calculation

[spock]

On 4/8/22, WBD was spun out of AT&T. According to the documents for the spinoff as well as https://costbasistools.com/spinoff/calculator.php the cost allocation to the original AT&T stock is around 0.76 -- this matches what my broker is saying my new lot cost basis values are.

However, when I try to do a spin-off through fund manager software (or manually do a return of capital), the cost allocation is not applied evenly across lots, for example one lot of AT&T receives a 0.71128 cost allocation, and another lot of AT&T receives a 0.78021 cost allocation. In other words, the software doesn't seem to be applying the cost allocation evenly across lots.

The tax lots for the spun off WBD in fund manager software match what I expect.

Is there something I might be doing wrong or a way to properly apply an even cost basis reduction to the original AT&T shares?

[Mark]

Hi spock,

1) Are you using the "Spin-off..." wizard to record this?
2) Are you using a taxable or tax-free spin-off?
3) What accounting method are you using?
4) Where exactly are you observing the "cost allocation" of your lots?

[spock]

Hi Mark, thank you for the reply

Hi spock,

1) Are you using the "Spin-off..." wizard to record this?

Yes

2) Are you using a taxable or tax-free spin-off?

Tax-free

3) What accounting method are you using?

I've tried all three, and the tax basis for the original AT&T lots always ends up the same.

4) Where exactly are you observing the "cost allocation" of your lots?

I'm looking at the "open lots" for the original AT&T shares after the event and dividing the current tax basis by the previous tax basis. I find that a lot purchased in 2006 was reduced to 71.1% of the previous tax basis, while a lot purchased in 2015 was reduced to 78.0% of the previous tax basis. The total new cost basis ends up correct, but the amount assigned to each lot does not.

[Mark]

Hi spock,

The Return of Capital distribution will reduce the tax basis of each owned share proportionally by number of shares, not by original cost basis. For example, if you have a $1,000 ROC and had owned 2 lots:

Lot 1: 100 shares purchased at $50/share (Cost $5,000)
Lot 2: 900 shares purchased at $75/share (Cost $67,500)

$100 of the ROC will go to the 100 shares, and $900 of it will go to the 900 shares. So, the 100 share cost will go from $5,000 to $4,900, a reduction of 2%. The 900 share cost will go from $67,500 to $66,600, a reduction of only 1.3%. The key is that the returned capital is apportioned evenly to each share owned at the time of the distribution. It is not apportioned based on the original cost basis of each share.

[spock]

Hi spock,

The Return of Capital distribution will reduce the tax basis of each owned share proportionally by number of shares, not by original cost basis. For example, if you have a $1,000 ROC and had owned 2 lots:

Lot 1: 100 shares purchased at $50/share (Cost $5,000)
Lot 2: 900 shares purchased at $75/share (Cost $67,500)

$100 of the ROC will go to the 100 shares, and $900 of it will go to the 900 shares. So, the 100 share cost will go from $5,000 to $4,900, a reduction of 2%. The 900 share cost will go from $67,500 to $66,600, a reduction of only 1.3%. The key is that the returned capital is apportioned evenly to each share owned at the time of the distribution. It is not apportioned based on the original cost basis of each share.

Is there an alternate approach I can use to get Fund Manager to have the correct tax basis for each lot following the spin off? The correct approach in this case (and if I'm not mistaken most cases?) is to look at each individual tax lot and adjust the cost basis accordingly. This is the approach taken here https://costbasistools.com/spinoff/calculator.php and by my broker. Fund Manager software calculates the correct cost basis for each lot of the new stock, but not the old lots, each of which should have a basis approximately 76% of what it had previously.

As an example, I created an investment with the two lots you specified above
1/1/2020 - 100 shares, cost $5,000 ($50/share)
1/1/2021 - 900 shares, cost $67,500 ($75/share)
on 2/1/2022, I created a spin-off with 1000 shares received. I enter a cost basis of $1,000. I select Tax-free and specific lot. The lots I end up with are

Old Stock:
1/1/2020 - 100 shares, cost $4,900 (reduced $100, now $49/share)
1/1/2021 - 900 shares, cost $66,600 (reduced $900, now $74/share)

New Stock:
1/1/2020 - 100 shares, cost $68.97 ($0.6897/share)
1/1/2021 - 900 shares, cost $931.03 ($1.0345/share)

Shouldn't the amount of cost basis that the 2020 shares were reduced by be the cost basis of the 2020 shares of the new stock? Shouldn't the percent allocation of cost basis be assigned evenly to each lot?

https://www.barrons.com/articles/how-to ... 1649692976

“If you own several blocks of T stock, you have to make this computation on a block-by-block basis,” Willens told Barron’s in an email. “You can’t simply aggregate the blocks of stock you own. Instead, each block of T stock is considered separate from any other blocks you might own.”

Am I misunderstanding this here? It's possible my broker has miscalculated the cost basis of my original lots, but a manual calculation seems to suggest that the broker is right and the calculation here is not.

[Mark]

Hi spock,

I'm not a tax professional, and can't say which way is right/wrong. I can say how FM is calculating it, which is allocating the cost differently than you were wanting. The totals should end up matching either way, but how the costs are allocated to each lot is different depending on the method used.

This is how FM does it: The reduction in cost basis of the parent is based off percentage of shares, not cost basis. The allocation of cost basis to the new child's shares are allocated based off a proportion of cost basis of each lot. Example: $68.97 = $1000 * ($5,000 / ($5,000 + $67,500)).

Based on your research, it seems the cost basis reduction in the parent should be calculated separately for each lot. One way you could accomplish this in Fund Manager is to separate your lots of the parent into separate investments, before recording the spin-off. This way, there is no question of allocating among lots, since there is only 1 lot in each investment at the time of the spin-off. If you have many lots, this might not be practical, but it is an option. One way you can do this is to use the "Transfer Between..." wizard, and for a destination investment, choose <new investment...>. Transfer 1 lot at a time, so you'd have to run the wizard once for every open lot you have at the time of the spin-off. You could leave your last lot in the original parent, so you only have to do N-1 transfers, where N is the number of open lots you had. After this, go run the spin-off.. wizard on each of these investments.

Thanks for sharing your learnings. Maybe we can make an improvement here to give the user more control over how multiple lots have their cost basis allocated during a spin-off.

[Mark]

Hi spock,

I was thinking about this some more, and there is another way to do it without creating additional investments for each lot. It would involve recording a Transfer Out and another Transfer In for each open lot. You can specify the cost basis for each Transfer In by multiplying the original tax basis by the 0.76 figure.

I would scale the OOP cost by this same amount. The Market Value figure would be the post-spin-off market value. Also, record an "Other" type of distribution for the total difference between market value pre/post spin-off.

You would have to manually create the child investment as well, and record the Transfer In shares for that too.

[spock]

Thank you! I chose that Transfer Out/In method. I used excel to create two CSVs that I imported for the transfer in and transfer out transactions and this seems to have worked well.

[Houstonwb]

I have a similar situation. Being able to adjust the basis of a Transfer Out transaction would be helpful.
For example, on 12/31/21, I have 100 shares.
The 6/30/22 statement shows I really have 95 shares. No change in cost, prices, or value. Likely a revision on the FI’s part.
How do I remove 5 shares without effecting the total cost or value? Sell and Transfer Out both effect the basis. Account can be taxable or tax-free.
I have a similar problem with another investment where the number of shares is unchanged, but the cost is nearly double what was reported 6 months ago. How do enter a transaction that changes the basis as reported 12/21 and to the new basis on 6/22? Share count and Value are the same in both periods.

>>I don’t know which share count or basis is correct so I would like a clear paper-trail of transactions to show the adjustments. FMgr should tie to the 12/31/21 and 6/30/22 statements even though one period might not be correct.

[Mark]

Hi Houstonwb,

I would try to understand what really happened, and why you went from 100 to 95 shares... One way you can change the number of shares without changing the cost basis is by recording a split. In this example it would be a split with a ratio of 95 for 100.

[Houstonwb]

Thank you.
And for the second situation of adjusting the basis, with no change in shares or value?
Are you recommending a two step entry: Buy shares to get the basis correct, and do a reverse Split to back out the quantity of new shares to bring the number of shares and the value back to their previous amounts?
For what it is worth, I am entering the transactions into FMgr from a year-end audit and a mid-year interim statement. Summary statements are not detailed enough to develop a perfect record to enter. Some of these issues may be cleaned up at the next year end. I want a clear record because I might have to reverse out the adjustments. I use FMgr to get period-over-period and returns comparisons that are hard to derive from accounting statements.

[Mark]

Hi Houstonwb,

You tax cost basis is set by the purchase price of those shares. Do you know why the cost basis changed? I would try to understand why the cost basis changed, and then decide how to record it. You can either correct the purchase price or if you paid some fee that increased the basis, you can record a negative valued "Account Fee" distribution, which will increase your basis. (Turn on the report option "Options / Report Preferences... / Capital Gains / Include Account Fees in Basis). Also, a Return Of Capital distribution type will lower your taxable cost basis.