Re: Tax-Free Spin-Offs

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Posted by Mark on January 14, 2007 at 09:57:24:

In Reply to: Tax-Free Spin-Offs posted by SS on January 13, 2007 at 22:04:20:

: Mark,

: I notice that the documentation with FM notes that spin-offs are handled always as if they are "taxable", but most of the spin-offs in which I participate are tax-free and I'm trying to figure out what difference, if any, that makes to the way FM handles these special situations. In particular, I'm wondering if by "taxable", the documentation is making reference to the need to establish a basis for the day of the spin-off, or to something else?

: Any insights appreciated.

Hi SS,

FM records spin-offs in a way to preserve the correct cost basis in both the parent and child investment. Keeping a correct cost basis is appropriate for both taxable and non-taxable investments. It may not be necessary in a tax-free investment, but it is still good to track accurately.

FM records spin-offs as a "Return Of Capital" distribution type in the parent, and a purchase in the child. Return of capital distributions lower your tax cost basis. The overall cost basis of these 2 investments will be the same as the parent before the spin-off.

Thanks,
Mark
--
Fund Manager - Portfolio Management Software

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