Review of Corporate Spinoff as improved in R48.8

q_lurker

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.

DETAILS

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.

1. A 30 share holding of Parent company; Basis = $300
   1. One subcase = one lot of 30 Parent shares
   2. Second subcase = 3 lots of 10 Parent shares each, basis = $50, 100, and 150 each lot.
2. Spinoff Child at a 1-for-3 share ratio, mid-year (7/1/22)
3. Parent FMV after spinoff = $10
4. Child FMV after spinoff = $7.50
5. Therefore 20% of Parent basis transfers to Child
   1. As (1/3 x 7.50) divided by (1/3 7.50 + 10) == 2.50 / 12.50 = 20%
6. Parent Basis should reduce from $300 (or $50, 100, 150) to $240 (or $40, 80, 120)
7. Child Basis should be $60 (or $10, 20, and 30 for the three lot case)

Values

• 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:

1. Account CS R29.9 1-lot (s)
   1. RtrnCapX for Parent Amount = $60, Mkt Value = $75
   2. Add Shares of Child 10 shares (corrected from 9.99999) with basis = $60
   3. 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.
2. Account CS R48.8 1-lot
   1. RtrnCapX for Parent Amount = $60, Mkt Value = $60
   2. Add Shares of Child 9.99999 shares (not yet corrected to 10) with basis = $60
   3. A MiscIncX transaction for Parent of $14.99. Same simplification as used above still possible.
3. Account CS R29.9 3-lot (s)
   1. This is the way Release R29.9 processed a three-lot holding with the same simplifications as applied to the first case.
   2. RtrnCapX for Parent Amount = $60, Mkt Value = $75.
   3. No MiscIncX transaction since that $15 is reflected in the two values of the RtrnCap transaction.
   4. Three Add Shares transactions for the three lots of the Child being created. Third lot corrected to reach the correct total of 10 shares
4. Account CS R48.8 3-lot
   1. This is the way Release R48.8 processed a three-lot holding without any simplifications applied.
   2. Remove Parent shares (all)
   3. MiscIncX from Parent for $74.99.
   4. Three Add Shares of Parent with properly reduced basis values
   5. 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.

q_lurker

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.

Geobrick

Q_Lurker, I've just tried the corporate spinoff wizzard in quicken for the first time in a long time. I've been using your manual method over the years but wanted to see how quicken handles spinoffs now (using Premier 48.15) so I tried it for the WBD spinoff from AT&T. I have 4 lots of T in a Merrill Lynch account and a single lot of T in a Vanguard account.

First I did the calculations in excel using the ratio, FMVs and calculated cost basis allocations in the 8937. Then I entered a corporate spinoff in quicken (used the same FMVs from the 8937 for the cost entries).

The single lot at Vanguard matched my calculations and the Vanguard statement exactly. I'll discuss the 4 lots at Merrill later.

I have some questions about the RtrnCapX and MiscIncX transactions in the brokerage account. I realize the RtrnCapX reduces the basis of the parent company by the basis allocated to the spinoff but where does the cash from the RtrnCapX go? I can't find it in the linked cash account and it's not used to buy the shares of WBD because that's done with an add shares transaction. The same is true for the MiscIncX. It shows a transfer to the the linked cash account but there's no transaction there. Plus, I'm not sure I fully understand the need for the MiscIncX transaction.

For the Merrlll account, as you said, there is no RtrnCapX transaction, the remove shs of T followed by adds of T and WBD for each lot with a MiscIncX transaction (again, not sure what it is or where that transaction is in the linked account. Maybe the wizard deletes it).

Here are the lot details for the spinoff:
(0.241917 ratio, FMVs: T=19.26 WBD=$24.43, basis allocated to WBD=23.48% based on the previous #s from the 8937)

The single Lot account:
75 shs T - $2,765.06 cost basis
Results:
RtrnCapX=649.24 (perfect match for excel)
MiscIncX=-205.99 (no idea what this # represents)
Added WBD: 18.143775 shs - 649.25 (perfect excel match for # of shs but 1 cent off for basis - and 2 cents off after the CIL)

The four Lot account:
200 shs T - $4,899.75 cost basis
71 shs T - $1,764.50 cost basis
70 shs T - $2,580.72 cost basis
23 shs T - $426.85 cost basis
Results:
Remove 364 shs T
MiscIncX=2,151.25 (still no idea what this # represents or where it is in the linked cash account)
Added T: 23 shs - $326.63 cost basis (perfect match for excel)
Added WBD: 5.564091 shs - $100.22 cost basis (perfect match for excel)
Added T: 70 shs - $1,974.77 cost basis (perfect match for excel)
Added WBD: 16.93419 shs - $605.95 cost basis (perfect match for excel)
Added T: 200 shs - $3,749.27 cost basis (under by 2 cents so fine)
Added WBD: 48.3834 shs - $1,150.48 cost basis (over by 2 cents so between the two adds up correctly)
Added T: 71 shs - $1,350.19 cost basis (perfect match for excel)
Added WBD: 17.176107 shs - $414.31 cost basis (perfect match for excel)

Over all excellent results I think.

My problem is that Merrill doesn't do CILs by lot. They add all the fractions and if it's over 1 share, that share stays in the account and the CIL is just for the remaining fraction. This results in a total of 88 shares of WBD vs 86 if they did a CIL by lot. With the extra 2 shares, they kept all the fractional shs as they appear above and only did a CIL for 0.057788 shares (the fraction after adding all the WBD shares above). The CIL only affected the 5.564091 lot of WBD which ended up as 5.5063 shs after the CIL. Fun stuff. They also apparently use a differnt FMV so I'll just edit quicken to match their method.

q_lurker

Q1: Where did the ___X cash go?

A1: Into the ether. I have not tried this revised spin-off action in an account with a linked cash account, so let's start by deferring on that nuance. For the more basic setup, those RtrnCapX and MiscIncX transactions reference to the originating brokerage account. Such self-referencing transactions are special like an Opening Balance whereby the cash is transferred to or comes from nowhere else in the Quicken file.

Having now tried it as a test with a linked cash account, I see the behavior you indicated. While this is adequate for accomplishing the goal, I consider it faulty because the user cannot manually enter these same transactions and get the same results as the automated path. Also, if one toggles the account from not having a linked cash account to having a linked cash account, the adjusted MiscIncX transaction gets buggered up.

Q2: What is this MiscIncX supposed to be?

A2: Good question. My answer is that it is a fudge factor specifically to get the Investment performance Report (IPR) correct. I'll go further with your two account cases since the value is different in the two cases

In the Vanguard single lot case, your basis returned (649.24) matched the basis added (within a penny) of the WBD shares. (That penny difference seems to be pervasive; I've seen it in a lot of my testing.) So with the RtrnCap and the Added Shares, you have the same cot basis removed from one holding and added to the other holding. That is great, but the IPR uses closing market value, not basis. So at that stage, you have Added in the investment column of the IPR 18.143775 shares at $24.43 = $443.25. In the Return column, you have 649.24 associated with the RtrnCap. In you case, an adjustment of 205.99 is needed. They chose to make up this MiscInc transaction to make that adjustment and to categorize it to unrealized gains. I prefer to delete that MiscIncX and edit the RtrnCap to show that the market value associated with the returned basis was 443.25. That also makes the IPR correct without the strange MiscInc transaction. To me that is sayng the RtrnCap removed basis of 649.24 (or .25) and removed market value of 443.25. The following Added Shares of WBD adds basis of 649.25 and market value of 443.25.

The four lot ML account is different but similar. In this case the approach is to remove all shares of the parent (T), and then Add back in all the shares of the parent at a reduced basis and all new shares of the spinoff child (WBD) at their basis. This accomplishes the first task that the basis before and afeter is unchanged. But the IPR is still a problem. You have removed 364 shares of T and added back in 364 shares of T and 88.058 shares of WBD. That is 364 shares of T @ 19.26 and 88.058 shares of WBD @ 24.43 in the Investment column and 364 shares of T @ 19.26 in the return column. Those are not balanced. Logically, one would want the T shares removed to be treated with a different value than the closing share value, but there is no provision or process in the IPR to make that distinction. Thus, a MiscIncX fudge factor of 18.058 * 24.43 = 2,151.25 is created.

So in the single lot case, the MiscIncX value is the difference between the basis and the closing market value of the Added (spinoff, WBD) shares 0.241917 * 75 * 24.43 - 0.2348 * 2765.06 = -205.99. In the multi-lot case, the MiscIncX is the full closing market value of the Added (spinoff, WBD) shares 0.241917 * 364 * 24.43 = 2151.25.

Q3: CIL and sold fractional shares?

While the distribution of the basis must be done in a lot-by-lot process, that is not the case in accounting for any fractional shares. That the fractional part of each lot netted you a couple of extra shares is all good. You brokerage appears to have sold the reulting 0.058 shares on a FIFO basis. and going forward they should be accounting for each of the four lots having a fractional component. In my experience, their reporting may not always reflect the full fractional share, so be cautious with your interpretations. Personally, I would edit the four WBD Add Shares transactions to have 2, 3, or 4 decimal precision consistent with detailed data from the brokerage. Likewise then, also make the sale of the fractional share correct with the same precision.

Hope that got all your questions adequately.

Geobrick

Thanks. Great information. It's a significant improvement in the corporate spinoff wizard but I like your idea of manually adding the market value into the RtrnCapX transaction and again in the add shares transaction so the MiscIncX transactions can be deleted.