What is a spin-off?
A spin-off occurs when a parent company divests itself of a subsidiary or a division of the company. The subsidiary or division then becomes a separate, independent company.
What does a spin-off mean for shareholders?
Shareholders of the parent company will normally receive shares of the spin-off company. The investor, generally, will receive one share of the spin-off for a pre-determined amount of shares of the parent company that the investor holds. For example, Bristol Myers Squibb (BMY) spun off Zimmer Holdings, Inc. (ZMH) on August 6th, 2001. BMY shareholders received one share of ZMH for every 10 shares of BMY held.
How does the shareholder determine cost basis for a spin-off?
Generally, the parent company will determine the percentage of the shareholder’s cost basis in the parent company that should be allocated to the new spin-off company. This information can usually be found at the parent company’s website. If not, contact the company directly and ask. In the case of the ZMH spin-off, 4.8223% of the original cost of each shareholder’s BMY shares was allocated to the ZMH shares. For instance, if an investor purchased $1,000 of BMY, the initial ZMH cost basis would be $48.22. After the spin-off the BMY cost basis adjusts to $951.78 ($1,000-$48.22).
For capital gains tax purposes, how does the shareholder determine the purchase date for a spin-off?
The spin-off company has the same purchase date as the shares of the parent company. The date the spin off occurred is not the date used to determine if a gain is long or short-term.
Are there any tax consequences to a spin-off?
The distribution of stock in a spin-off normally has no tax consequences. However, many companies will send checks to shareholders for cash in lieu of fractional shares. Essentially, this means that any fractional shares that the investor should receive were instead sold and a check was issued for the proceeds. There could be a capital gain or loss depending upon the newly assigned cost basis and the sale price. In general though, it is usually a very small, if any, tax consequence.
Again, let us use the ZMH spin-off as an example: If an investor owned 125 shares of BMY, he or she should have received 12.5 shares of ZMH. However, the investor received only 12 shares of ZMH and a check for the proceeds for the sale of 0.5 shares.
How does Henssler Financial handle spin-offs?
Henssler Financial (HF) often sells spin-off companies immediately after they occur to stocks in our model portfolio. The stocks held in the Henssler Model Portfolio have to meet certain standards of quality and financial safety. If the company created in the spin-off does not meet certain criteria, HF will sell it. If the spin-off company does meet the criteria, HF will determine if it is a company that we want in the model portfolio. There is often a lot of uncertainty involved with spin-off companies because there is not enough historical data available to determine how well the company manages itself on its own. For these reasons, HF sells most spin-offs. For more information contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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