How to enter a spinoff transaction?

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Glen

12 Jan, 2022 05:58 PM

Recently, one of my REIT's spun off a "daughter" REIT, share holder's were granted shares in the new REIT in a 10:1 ratio. I treated this as a dividend and a purchase of a new security in two separate transactions. Perhaps there is a batter way?

  1. 1 Posted by dwg on 12 Jan, 2022 09:14 PM

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    I'm a fellow user.

    The answer is that it "depends".

    When you have a spinoff their are multiple ways it can be potentially 'funded'.

    I've seen some funded by Dividends, some funded by a return of capital, some funded by a share sale then the shares split in the original entity to get you back to the same number of shares, etc. Companies can be very creative and there can also be various legal and taxation requirements just to make it interesting.

    In my view the way to treat it in Moneydance is dependent on the way the transaction was funded.

  2. 2 Posted by Glen on 12 Jan, 2022 09:38 PM

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    Thanks for your response, dwg.

    In thia case, the spinoff was "funded" by a non-cash share distribution that did not reduce the number of shares of the parent company, they simply isssued one share of new stock in the spinoff for every ten shares held in the parent. I understand that fractional shares were paid in cash, not applicable in my case.

    So it isn't really dividend income as my entry would show in an income report, but it does represent a transfer of value from the parent to shareholders (well, not really because theoretically anyway, the value of the parent is reduced by the net value of the spun off company). But, it seems like one of income, basis, or return has got to give no matter how it is accounted.

  3. 3 Posted by dwg on 12 Jan, 2022 09:49 PM

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    From your description it sounds like it was funded as a return of capital, this reduces your cost basis of your existing shares and the 'proceeds' are used to 'purchase' shares in the spun off entity. This is a very common method as capital often has to be moved.

    The problem from a Moneydance perspective is that it does not have a RoC action type (it has been requested). There are various methods that have been developed by users to deal with this, there is just not a perfect approach.

    I'm sure we can outline some of the methods, as well as their pros and cons, if you are interested.

  4. 4 Posted by Glen on 12 Jan, 2022 10:16 PM

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    It does not appear that my broker has adjusted the cost basis of the investment in the parent company so I may have to convince the IRS when I eventually sell these shares. I would be very interested in any method of accounting for this situation that effectively reflects reality (tax implications are far from reality, of course).

    Interesting to note that Mr. Market devalued the parent at about the time of issuance.

  5. 5 Posted by dwg on 13 Jan, 2022 12:01 AM

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    Mr market is saying the existing company has less assets and less income now so is worth less, pretty reasonable view to take after a spinoff.

    Brokers are interested in commission :)

    I would look to what the company says about the spinoff, in my neck of the woods they publish information on how the transaction is being handled, they are even obliged to get taxation advice or a ruling on the approach being take.

    I'll be a bit lazy the discussion pointed to below talks about RoC and some of the approaches, its old but still valid.

    https://infinitekind.tenderapp.com/discussions/general-questions/2141-return-of-capital

    The sell each lost at cost price and re-buy at the new works, but you lose performance data, and could potentially be a lot of work ( I have one investment that would now approach 2000 transactions to use this - I have to use lot matching) but for a one off could be workable.

    I have set my investments in MD to Average cost and use the sell at 0 cost method. I keep spreadsheets with the lot information so my MD information is more like just a summary.

    So I get a history in MD for the total investment in a company, reports like cost basis are rubbish, but my spreadsheets take care of that data.

    In effect I use MD to keep and report total type data plus provide me with Income and expense reports. Capital gains/losses are managed outside but I pass entries through the MD accounts so my reports do contain the right data, even if it is not MD calculating all of it.

  6. System closed this discussion on 14 Apr, 2022 12:10 AM.

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