Occasionally, a company will distribute new securities in a divested subsidiary. These transactions, sometimes called "Spin-Offs", may or may not be tax-free, depending on the circumstances.

 

Spin-Off type divestitures involve receiving shares in a new corporation (usually a former division of the original corporation) without surrendering old shares. Such divestitures are generally treated similarly to tax-free exchanges. The only difference is that no securities are surrendered.

 

To obtain the correct cost basis and ROI for the parent stock in a spin-off type divestiture, both a DLV and RCV type transaction are required. The DLV transaction should have zero quantity since the number of shares owned of the parent stock will not be reduced.  The Amount of the DLV transaction should be the amount by which the market value of the parent security is reduced due to the spin-off.  The Aux Amount of the DLV transaction must indicate the amount the cost basis of the parent security is to be reduced. The  RCV transaction is used to specify the shares of the spun-off security, the value of the shares (in the Amount field) and the original acquisition date and cost (in the Aux Date and Aux Amount fields).

 

In the following example, "AYZ" is bought, and subsequently 100 shares of "BYZ", worth $6,000, are spun off.  This reduces the market value of "AYZ" by $6,000 and reduces the cost basis by $4,000.

 

 

Note that the DLV and RCV transactions have identical magnitude Amount and Aux Amount fields but opposition signs, thereby indicating the transfer of value and cost basis.

 

Tax Lot - The example above does not show use of tax lots.  However if tax lots are used, the "DLV" transaction. which is simply delivering out cost, should have a "blank" tax lot, so as to indicate the cost adjustment is to be spread over all prior purchase transactions.

 

Security Spin Off Generation - If you need to enter transactions relating to a spin-off that affects multiple portfolios, you can save effort by using the Security Spin Off Generation tool.   This is covered in more detail in Data Tools.