Spinoffs and Mergers - cost basis allocations and tax considerations

Corporate mergers and spin-offs are the source of many questions from individuals and investment clubs.    These questions usually focus on the calculation or allocation of cost basis and the determination of the holding period related to the sale of a security that was obtained as the result of a merger or a spin-off.
First, let's address the issue of the holding period as it relates to most spin-offs and mergers.   Typically for tax purposes,  the holding period of any block of a security that you have acquired as a result of a merger or spin-off starts on the same date as your original block of stock.    IRS Publication 550 states that "the holding period for new stock you received as a non taxable stock dividend begins on the same day as the holding period of the old stock.  This rule also applies to stock acquired in a spin-off,..."
Generally, a merger results in the receipt of shares in an acquiring company in exchange for the shares that you held in the company being acquired.   The cost basis of these new shares must be allocated block for block to the new company shares.   For example, let's say you hold 2 blocks of XYZ Corp, one of 100 shares and a second of 200 shares, each block with cost basis of $1000 and $2400 respectively.    XYZ Corp. merges with another company at a 3 shares to one ratio, you now allocate the original $1000 cost basis of the first 100 share block over the new 300 shares and the original $2400 cost basis of the second 200 shares over the new 600 shares.     Using bivio accounting you will discover that all of these detailed block by block calculations are done for you automatically.   All you need to do is enter the share ratio and any cash in lieu of fractional shares, if any resulted from the merger transaction.
Spin-offs are generally treated like a stock dividend whereby you receive stock in a new company while still holding shares in the old company.  In this case, on a block by block basis, IRS Pub 550 states that "you must divide the adjusted basis of your old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of the distribution of the new stock".  It sounds complex, but it really isn't.  In most cases, the old company and/or its spin-off company will provide you with the result of this calculation in the form of a percentage that you should use to allocate your original cost basis between the two companies.  This information is also likely to be found under the Investor Relations area of each companies web site shortly after the spin-off has been completed. 
bivio takes the drudgery out of doing these calculations and manually adjusting the cost basis of each block of stock.  Providing bivio with the percentage or remaining basis allocated to the old company, as often detailed in company provided documentation or on their web sites, is all that is required to do this cost basis allocation.  If the company doesn't provide you with this documentation, bivio will calculate this allocation ratio for you using the supplementary calculator, or you can do it manually with the following formula.
 (# of post spin-off shares of parent x post spin-off price of parent) divided by ((# of post spin-off shares of parent x post spin-off price of parent) + (# of post spin-off shares of spin-off x post spin-off price of spin-off)) resulting in the percentage of your original cost basis that should remain allocated to your original shares. 
The balance of the original cost basis that is not allocated to your original shares will then be allocated to your newly received spin-off company shares.  Note: Be sure to include the number of any fractional shares resulting from the spin-off when you do this calculations even if you received cash in lieu of those fractional shares.  
Jerry Dressel
St.Louis, Missouri