Review of Corporate Spinoff as improved in R48.8
SUMMARY – While I am disappointed in the path they took, the improvement does get the cost basis values of the parent company correct for both single-lot and multi-lot parent company holdings. It also gets the Average Annual Return figures correct. However, Return ($) will be incorrect and thus ROI (%) and other related performance measures will be wrong. Those two are low on my priority list. YMMV.
I have railed about Quicken’s Corporate Spinoff behavior for too long. I am disappointed in Quicken’s current solution to the problems with the prior rendition of this macro-transaction. May be time to get off this train.
Quicken’s prior rendition (since R29.9 in Sept 2021) was to use transactions RtrnCapX, MiscIncX, and Add Shares for all such events. That was OK for single lot holdings but could have been simpler and cleaner. For multi-lot holdings, the RtrnCapX resulted in wrong cost basis values of the parent security.
The R48.8 release (March 2023) offers “Improved allocation of cost basis using the Spinoff Wizard”. That improvement does not change the single lot spinoff; it continues using the same three transactions. I would have rather seen the simplification of deleting the MiscIncX transaction.
The improvement for multiple lot holdings is to have the wizard create a different MiscIncX for the Parent, a Remove Shares of the Parent , and a set of Add Shares for each lot for both Parent and Child securities. My preference would have been to adapt the RtrnCapX transaction to allocate basis adjustment in an alternate fashion (per lot basis) for this type of event.
I set up a fairly simple test case to try to identify some of the related nuances.
- A 30 share holding of Parent company; Basis = $300
- One subcase = one lot of 30 Parent shares
- Second subcase = 3 lots of 10 Parent shares each, basis = $50, 100, and 150 each lot.
- Spinoff Child at a 1-for-3 share ratio, mid-year (7/1/22)
- Parent FMV after spinoff = $10
- Child FMV after spinoff = $7.50
- Therefore 20% of Parent basis transfers to Child
- As (1/3 x 7.50) divided by (1/3 7.50 + 10) == 2.50 / 12.50 = 20%
- Parent Basis should reduce from $300 (or $50, 100, 150) to $240 (or $40, 80, 120)
- Child Basis should be $60 (or $10, 20, and 30 for the three lot case)
- Beginning of year value at $10/share for Parent x 30 = $30
- End of year value of Parent at $12/share x 30 = $360
- End of year value of Child at $9/share x 10 = $90
- End of year total value = $450 = 50% more than beginning of year
Results over a one-year period (1/1/22 – 12/31/22) with the spinoff recorded at mid-year (7/1/22)
Four accounts used for the comparisons:
- Account CS R29.9 1-lot (s)
- RtrnCapX for Parent Amount = $60, Mkt Value = $75
- Add Shares of Child 10 shares (corrected from 9.99999) with basis = $60
- To simplify, the initial MiscIncX transaction of $15 was deleted since that was covered by the increase on the RtrnCapX market value from $60 to $75.
- Account CS R48.8 1-lot
- RtrnCapX for Parent Amount = $60, Mkt Value = $60
- Add Shares of Child 9.99999 shares (not yet corrected to 10) with basis = $60
- A MiscIncX transaction for Parent of $14.99. Same simplification as used above still possible.
- Account CS R29.9 3-lot (s)
- This is the way Release R29.9 processed a three-lot holding with the same simplifications as applied to the first case.
- RtrnCapX for Parent Amount = $60, Mkt Value = $75.
- No MiscIncX transaction since that $15 is reflected in the two values of the RtrnCap transaction.
- Three Add Shares transactions for the three lots of the Child being created. Third lot corrected to reach the correct total of 10 shares
- Account CS R48.8 3-lot
- This is the way Release R48.8 processed a three-lot holding without any simplifications applied.
- Remove Parent shares (all)
- MiscIncX from Parent for $74.99.
- Three Add Shares of Parent with properly reduced basis values
- Three Add Shares of Child with the proper basis.
Results are shown in the screen snip below as a customized Portfolio View. The red dots are where I believe the chosen methodology is producing poor results.
I consider the top case the most correct with an overall Average Annual Return for the one year period of 50% and the $150 Return value. (It is arguable that the $360 value for Amount Invested for the overall account is wrong, but it is consistent with other Quicken calculations. That is not a battle to be fought here, IMO.)
The third case has dots adjacent to the basis values of the Parent lots. This was the definitive problem with the RtrnCap used on a multiple lot holding with the R29.9 release. It is only coincidental that the middle lot came out with the correct value. That the basis was wrongly computed then meant that Gain/Loss was wrongly computed.
The second account has dots next to the Return values. The Return value for the Parent is $14.99 higher than it should be because of the MiscIncX transaction. That then makes the Return Value for the account high by that amount and from those the ROI % is then off. As done in the first account, this can be remedied by deleting the MiscincX transaction and having the RtrnCapX reflect the Market value of the added Child shares of $75.
The fourth case, R48.8 results, has problems (red dots) with the Return values just as with the single lot case, but the magnitude is greater and there is no fix. Those errors again flow to the ROI% values.
I greatly appreciate that the Cost Basis of the lots is now getting properly adjusted for a multi-lot parent company holding.
I greatly appreciate that the Investment Performance Report and related Average Annual Return percentages are now correct.
I dislike greatly the MiscIncX transaction that is not reality, that is avoidable for a single lot parent holding, and that leads to erroneous return values and errors in related performance measurements.
IT MAKES NO SENSE …
A single-lot spinoff creates a MiscIncX transaction with one amount; a multi-lot spinoff with the same total number of shares creates a MiscIncX transaction with a very different amount. That then leads to a single lot spinoff generating one level of Return and a multi-lot spinoff of the same total shares generating a Return much higher. I understand the math and why that fudge had to be created, but that fudge – the MiscIncX transaction – is just that, a fudge factor.
My suggestion doing away with the MiscIncX transactoins —
For a single lot parent company case where the wizard has created a RtrnCapX transaction, compute the full market value of the spunoff company on that date (shares x closing value). Edit the RtrnCapX transaction inserting the just computed spun off market value in the Market Value field of the RtrnCapX. Delete the MicIncX transaction.
For a multi-lot parent company case where Add Shares of the parent company have been generated, create a RtrnCap for the parent company with $0 in the Amount field and the same spunoff company market value in the Market Value field.
These changes keep the Average Annual Return calculations correct without inflating the overall Return $ of the account or parent company.1