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Stock Cost Basis Transfer on Tender Offer ?
Old 01-26-2021, 05:58 AM   #1
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Stock Cost Basis Transfer on Tender Offer ?

Public company A is doing a spin off exchange offer of one of its divisions and merging with public company B.

If you have shares of A, you can decide to have a portion of your shares exchanged at some conversion rate for shares in B.

Question: If you have a large unrealized gain in shares of A. is there a basis that's transferred over to shares you convert to B ?

So if you had $30k in A, cost basis of $15k, and you tender 1/3 of your shares converted to B is your new cost basis in B:
  • The price of B holdings when converted ($10k) ?
  • Cost basis of portion of A converted ($5k) ?

If there's a basis transfer. would the investment company holding shares calculate, track, pass a basis to new shares ? Or is that responsibility of person owning shares ?

As always, THANKS !
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Old 01-26-2021, 07:22 AM   #2
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My vague memory of going through this is that stockholder relations gave guidance on the % basis in A and B after the spinoff.

I just found a pdf with the breakout. What I can't verify is whether it was stockholder relations or my broker (Vanguard) that issued it but it seems very clear the company provided the information. The existing company was ECA, the spinoff was CVE. Those are canadian companies but the pdf I have says something about US Federal Income Tax considerations. The important part read:

EnCana’s estimate of the allocation of an EnCana Shareholder’s adjusted cost base in EnCana Common Shares between the New EnCana Common Shares and EnCana Special Shares immediately after the exchange is:

New EnCana Common Shares 51.5%

EnCana Special Shares 48.5%

This was calculated from prices on the spin off day, so if yours hasn't actually happened yet, wait some time after the spinoff for such a notice. If it has happened and you haven't heard anything, contact stockholder relations of one or both companies.
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Old 01-26-2021, 07:28 AM   #3
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That sounds right...the company would provide the percentage splits of shareholders basis.
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Old 01-26-2021, 08:06 AM   #4
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Company will provide tax guidance.
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Old 01-26-2021, 08:16 AM   #5
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Thanks ! So since 2008, costs basis has to be tracked by investment company - I’m assuming the investment company holding the shares would split and record the original basis proportion to the spin off.

Correct ? Have a great day !
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Old 01-26-2021, 08:54 AM   #6
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I think 2010/2011 was the split between them tracking and not tracking the basis. I think mutual funds were a year later. Verify this yourself if you're right around that time frame.
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Old 01-26-2021, 08:56 AM   #7
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Quote:
Originally Posted by Delawaredave5 View Post
Thanks ! So since 2008, costs basis has to be tracked by investment company - I’m assuming the investment company holding the shares would split and record the original basis proportion to the spin off.

Correct ? Have a great day !
Maybe. Probably?

Ultimately it is the taxpayer's responsibility to ensure that basis is properly reported on Schedule D and/or Form 8949 when you eventually sell the shares.

There have been some laws passed in the last decade or so which require the investment companies to track the basis for you for certain assets. It looks like the laws for equities was passed in 2008, but only started requiring them to track stock basis starting 1/1/2011. Before then they may have done so, and probably did so correctly.

Even so, with spinoffs like this, it is possible for the investment company to make a mistake. If you end up with shares in both companies, I would find the company document describing the basis allocation when it becomes available, then check with the investment company and make sure they have allocated the basis properly on your shares.

And like RunningBum, when I had to go through this, I don't remember the details except that the basis was allocated in some fashion based on the closing prices of the two stocks on the day that the spinoff took effect. I think it was the relative market capitalizations, so something like allocation of basis to company B was (closing price of B day of spinoff * shares of B day of spinoff) / (previous day's closing price of A * shares of A previous day), where A in the denominator is the original A with B as a part of it.
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Old 01-26-2021, 09:51 AM   #8
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Quote:
Originally Posted by Delawaredave5 View Post
Thanks ! So since 2008, costs basis has to be tracked by investment company - I’m assuming the investment company holding the shares would split and record the original basis proportion to the spin off.

Correct ? Have a great day !
What happens is that your basis on the date the spin and merger occurs is split between two different tickers based on percentages supplied by the issuer.

While i would think that the brokerage would adjust their basis records for the spin and merger, I would check it shortly after the split to see if they did it and if they did it correctly. Or you can call your broker and ask them what will happen with your basis records with them and see what they say.
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Old 01-26-2021, 09:58 AM   #9
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Quote:
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What happens is that your basis on the date the spin and merger occurs is split between two different tickers based on percentages supplied by the issuer.

While i would think that the brokerage would adjust their basis records for the spin and merger, I would check it shortly after the split to see if they did it and if they did it correctly. Or you can call your broker and ask them what will happen with your basis records with them and see what they say.
Thanks. Someone told me "convert as much as possible to B and sell in a month to avoid tax" does not appear correct -- some prorated basis goes with conversion to B.

How the ratio is assigned, how it is tracked, etc is fuzzy - but clear that basis is transferred and stockholder's ultimate responsibility to ensure correct.
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Old 01-26-2021, 10:07 AM   #10
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I have been through a few of these. The company will provide published guidance from their tax counsel. Use the guidance along with your own records to check basis as determined by broker. If there are differences then contact broker.
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