Merck spinoff

[faezandyc]

Merck (MRK) recently had a 1:10 spinoff of Organon & Co (OGN).
I got a few shares of OGN put into my Ameritrade account; the "Price" is given as $0.00 on my Ameritrade statement.
When I try to enter "New investment" in Fund Manager it won't accept a "price" of zero.
What am I doing wrong?

Andy Christensen

Update: I checked the Ameritrade account and they have a cost basis; don't know how they arrived at that but I'll use it.

[Mark]

Hi Andy,

You might prefer to use the "Spin-Off Wizard". If you go to your Merck investment, and right mouse click, and choose "Investment Data / Spin-Off..." you can enter in all the info. This will handle moving the cost basis to the spun off investment.

[faezandyc]

Thanks, Mark. I wasn't aware of the Spin-off Wizard. I guess I should check the tutorials more, eh?

One more question: the cash-in-lieu of fractional shares; I assume that would be recorded as "return of principal"?

Andy

[Mark]

Hi Andy,

You can record the fractional shares according to the spin-off ratio, and then record a sell transaction for the partial shares, so you end up without any fraction of shares.

[Tom Kehrwald]

Hi Mark, The spin-off wizard is very slick and saves a lot of work. Thanks for it. My question is: shouldn't the out-of-pocket cost for OGN be the same as its cost basis when it began trading? When I look at the investment data in my case it shows 37.00 for OOP cost {the price at which it first traded] and the correct lesser number for cost basis?

[Mark]

Hi Tom,

I’m out of the office this week. Let me look at this when I return and I’ll update this thread then.

[Mark]

Hi Tom,

The spin-off wizard doesn't prompt you for a OOP basis of the child. It only prompts you for the tax cost basis. It defaults to use the market value of the spun-off shares as the OOP basis. If you want to change this, you can edit the details of the transfer in transaction in the child.

Since your OOP basis of the parent will be reduced by the market value, this amount is used as the OOP basis of the child, so you're basically transferring an equal amount of OOP basis from parent to child.

[Tom Kehrwald]

Thank you for this reply, Mark. I can honestly see two ways of looking at OOP cost basis from a common sense point of view. Perhaps I don't understand the accounting sense of OOP.

On the one hand, if I invest $10,000 in a stock and its spins off a child 1:4, I end up owning parent and child. I consider my OOP dollars have been split in the same ratio as the adjusted cost basis is divided by the split.

On the other hand your explanation implies that I should think of the spin off as being a return of capital which I decided to invest in the child at the current market price.

As you point out, I can adjust the details in the transaction to fit my own definition. I'm now just not sure which way I should think about this for myself. The first way of thinking of OOP (On the one hand ...) avoids the confusing situation where one might see an OOP loss but a taxable gain on certain transactions.

[Mark]

Hi Tom,

When you have a spin-off, you're moving part of the value from the parent to the child. The values you specify are the tax cost basis and market value that you move from parent to child. You don't explicitly specify OOP basis, but the OOP basis of the parent is reduced by the market value of the child, as a distribution out of the parent. For this reason, it is probably best to keep the OOP of the child equal to this market value, so the overall OOP cost of your portfolio remains un-changed due to a spin-off, since you didn't add/remove any money to the portfolio.