Q's way of handling Corporate Security Spin-off Causes Issues/Confusion

Paul Suchma

The history I have seen shows these transactions in my brokerage reports:

1. Spin-off shows a unit number of shares of the new security.
2. Any fractional old shares not used to convert old to new shares show as a cash transaction to my account.

However Q has me input A) New shares issued per old share, B) Closing prices of old shares and C) Closing price of new shares on the day of the spin-off. This forces me to compute a fractional value for A, which often results in the total new shares with a non-integral value, which I then have to fix. Q does show the old shares as removed as a lump sum, and then added back in sub-amounts based on their purchase dates. I suspect that Q does this to track price history, but would prefer if it let me enter the spin-off in terms of integral old and new shares, along with the cash that goes to me for any fractional shares not used in the multiplier from old to new shares.

Have others seen this and can you suggest any workarounds?

[Edited- Readability]

q_lurker

While the transactions you see from your broker (either online, as a confirmation, or as a periodic statement) may appear to the investor that simply, there is more going on in the back room than meets the eye. Back there, they are treating that cash-in-lieu distribution as a sale of the fractional shares that is reportable on 1099-B forms produced for the year's tax statements.

Back there, they are adjusting the basis of each lot of the parent company to reduce that basis by a percentage based on the 'fair market values' of the two securities 'immediately' after the spinoff closed. You may be able online to access the individual tax lots and see that the effects of that adjustment, but I have never seen actual 'transactions' documenting those types of adjustments.

You should not be 'computing' a fractional value for A, as you stated. You should be determining what the company specified for that fractional ratio. As an example, while you might end with 3 new shares for the 10 you had, the correct fraction would undoubtedly be 0.333333 rather than the 0.3 you'd compute.

While you suggest 'price-history' as the reason for the Remove Shares / Add Shares sequence, it is actually done for tax basis (individual lot cost basis) reasons. It is the program's way to get to the correct end point.

I do believe the Corporate Spinoff wizard could be improved and made more user-friendly - mostly in the manner of determining how the basis is allocated between the parent and the spinoff where Quicken is currently dependent on the two prices you cited. Those prices are not always self-evident. But spinoffs remain a complicated enough event that user control and user understanding seem to me to be of paramount importance. I don't see it coming down to the simplicity of "I got x shares of child and $y cash for the z-shares of parent I had. Quicken, you figure out the rest."

I suppose I am saying the 'workaround' is to fully understand the real world characteristics of the spinoff and work from there.

Paul Suchma

Actually I think do understand what Q is trying to do regarding price history based on shares of the parent company since Q removed them all and then added them back as sub-lots equal in size to the original purchase lots. Each of these was used to compute the size (with a fractional amount) of a sub-lot of the spun-off shares. I did compute the new/old shares ratio to multiple digits, but even with this I did not get an exact match for the new shares. In this case I got 31 new shares for the 127 old shares for a ratio of 0.244094488….., but Q only keeps this as 0.244094, resulting in new shares that are short 0.000062 of the 31 I got. I was able to fix this by creating a placeholder transaction.

As to prices the old/new share ones are supposed to be the closing ones on the day spin-off. I did not expect Q provide these but found them on the web. That said the cash dividend in lieu of my fractional spun-off share I got a few days later as reported on my brokerage report does not seem to agree with what I'd expect based on the closing prices.

As to Q's goal to get to the correct end point regarding tax bases I am a bit skeptical since it has to rely on prices I find/enter. Not sure if I will have the data to or ambition to confirm this when I get next years tax forms.

q_lurker

You are not applying Quicken's Corporate spinoff correctly and I certainly agree it can be confusing and can cause issues. While not required, it is frequently helpful in these discussions to know the parent and spinoff companies.

Firstly, you are indicating you used a spinoff ratio of 0.244xxxxx based on you showing 31 shares spunoff from a 127 share holding. The correct ratio is almost certainly 0.25 by which your 127 shares holding would have owed you 31.75 shares. The fractional 0.75 shares were not distributed but instead were aggregated together with all other shareholders and sold (likely a few days later) with the sale proceeds distributed to those due the fractional shares as cash-in-lieu of the shares.

Secondly about the price inputs Quicken is prompting for: you understand correctly that Quicken is framing those as closing values on the date of the spinoff. That may or may not be correct with respect to what your brokerage is doing or what the parent company suggests on their IRS form 8937. The values are used to determine how the cost basis of the parent company is shared between parent and spinoff. That determination than factors into capital gains and losses at such time as you choose to sell shares of either.

Is precision on that basis allocation important? Investors will answer that question differently. Those who rely solely on the brokerages 1099 forms might not care. Those who want to match exactly might care deeply. Those who want to be able to check gain/loss performance in the interim will have their needs. Whether the holding is in a retirement account or a taxable account may be a factor for some. It is dangerous to generalize, but I tend to see the differences as relatively small.

You should be able to currently check the cost basis Quicken is showing (calculated using the close of day valuations you entered) versus what the brokerage is showing. That would apply to both parent and spinoff holdings. That is not an 'end of year' question.

Thirdly, you said "the cash dividend in lieu of my fractional spun-off share I got a few days later as reported on my brokerage report does not seem to agree with what I'd expect based on the closing prices." FWIW, it is not a cash dividend; it is actually a partial capital gain and should be reported on your broker's 1099-B at end of year. You should not expect that $/share to equal the closing price of the spinoff on that effective date of the spinoff. The aggregate sale can take place during the day and may be one to a few days after the actual spinoff.

Hope this helps you better understand what is taking place real world as well as within Quicken.