How can I see Cost Basis Adjustment after Spinoff - Merck Organon

datajunkie
datajunkie Quicken Windows Subscription Member ✭✭
edited February 16 in Investing (Windows)

I noticed a difference on my 1099-B vs Quicken on the sale of some Merck stock. I figured out that there was a spinoff of Organon in 2021 and Schwab reduced the cost basis of Merck and added the shares of Organon in my statements. Schwab only downloaded a "Shares added" transaction for the Organon stock that was spun off. I was able to modify the transaction to add the cost basis and date when I sold the Organon stock in 2022. However, the cost basis for Merck was never adjusted.

I noticed that there is a "Corporate Securities Spinoff" transaction in Quicken. Before deleting the "Shares Added" transaction and entering the "Corporate Spinoff" transaction, I would like to know the ramifications.

Will this cause any problems in my sell of Organic transaction or will it just show a short sale that I can modify later?

How will the cost basis for Merck be shown in Quicken? Will it be a new transaction?

Thanks in advance for any feedback.

Comments

  • q_lurker
    q_lurker Quicken Windows Subscription SuperUser ✭✭✭✭✭

    In principle, that type of corporate spinoff transfers basis from the parent company to the spinoff. For a single lot parent company, Quicken's Corporate Spinoff action will generate a RtrnCapX transaction to reduce the parent company basis and the generated Add Shares will use that same amount as the basis of the new spinoff holding. If Quicken sees multiple lots of the parent company, Quicken will remove all shares of the parent company, then use Add Shares to recreate the lots of both parent and spinoff with the appropriate basis of each lot.

    I have never seen downloads from the brokerage adjust down the parent company basis, even though that does get done behind the scenes. Likewise, the download of the new spinoff is not normally correct for a multi-lot holding. I've usually only seen it as a single lot download.

    I generally recommend doing the Corporate Spinoff independent of and preferably before the brokerage download.

    Question: One lot of Merck or multiple lots? Regardless, backup before doing anything, just in case!

    One lot - the easiest path would be one RtrnCapX transaction;

    • Security = Merck
    • Amount = Basis transferred to Organon
    • Market Value = Value of Organon holding first day after spinoff.
    • Transfer Account = brokerage account holding the Merck shares
    • No need to delete the Add Shares of Organon (assuming that data is alreadyy correct).

    Multiple lots - How important is it to get the lot by lot data correct? Most rigorous —

    • Delete the downloaded Add Shares of Organon
    • Use the Corporate Spinoff action with a best guess for prices like the two closing values day after spinoff.
    • Because Organon is already a security in your file, you'll need to spinoff a slightly different company (2Organon, maybe).
    • After the spinoff, edit the newly generated spinoff Add Shares to refer to the correct spinoff (Organon) rather than your new version (2Organon).
    • Review the basis of both sets to make sure they are sufficiently accurate. If desired, you can edit the basis of each Add Shares to get to the 'right' values.
    • If you'd like to share more detail and how much the basis of your Merck shares dropped due to the spinoff (After basis was X% of before basis), I'll take a stab at computing better prices to use in the Corporate spinoff action.

    The other thing to be aware of is if you received any cash-in-lieu for a fractional share of Organon. The Quicken corporate spinoff will generate that fractional share which then should be sold for the cash-in-lieu amount received.

    FWIW: This is the at-the-time discussion of that spinoff:

    https://community.quicken.com/discussion/7894737/merck-spinoff-of-organon-thread-for-all-related-questions-comments

    Hope this helps

  • datajunkie
    datajunkie Quicken Windows Subscription Member ✭✭

    Fortunately I have only one lot of Merck for this spinoff. But I do have a couple of other spinoffs that I will also need to take care of.

    Can you confirm the RtrnCapX  will not add to the cash balance?

    Yes this helps. Thank you for the reply (and the education).

  • datajunkie
    datajunkie Quicken Windows Subscription Member ✭✭

    q_lurker,

    To respond to your request for details -

    I received one tenth of a share of Organon for each share of Merck.

    The basis for one share of Organon on June 2, 2021, the date of the spinoff, was initially 38.3408 per share. This was on my June 30 Statement but no transactions were shown, just the position, market value, and cost basis. The Merck cost basis was reduced by the Organon cost basis (3.83408 per Merck share)

    Merck was priced at 71.6861 per share on COB Jun 1, and 72.344 on COB Jun 2, and 73.91 on COB Jun 3. It actually went up. By Jun 30, the share price was 77.77 per share.

    On my July 31 statement, the cost basis for Organon was increased to 38.8564 per share. Again there were no transactions in the statement. The Merck cost basis was also decreased by the same total dollar amount of the Organon increase. The cost basis for Merck did not change afterwards.

  • q_lurker
    q_lurker Quicken Windows Subscription SuperUser ✭✭✭✭✭

    RtrnCapX with the 'transfer account' set to the same account where the transaction is recorded will not affect cash balance. That self referencing 'technique' gets a special case treatment whereby the cash comes from or goes into thin air. The technique is commonly used in Opening Balance transactions where the cash does not come from a category or other account. In this type of case, the cash from the basis of the Merck holding goes off into thin air at the same time the cash that becomes the basis of the Organon holding also has no real source.

    For a single lot spinoff, all the pricing info is moot. You only need two or three transactions. As I processed the deal starting with 150 Merck shares in one lot with a basis of $6,685.50, I found my FI subsequently reported my Merck basis dropped to $6,370.83, a drop of 314.67 or 4.707%. For reference, the Form 8937 filed by Merck suggested 4.77% as a justifiable transfer. That Form 8937 value is not binding, only a suggestion.

    I also noted the Organon closing price 6/3/21 was $35.26. For the 15 shares received, that meant a market value of $528.90.

    Those values led to this Quicken transaction:

    image.png

    The second transaction is the Add Shares of the spinoff Organon. For my case, that looked like this:

    image.png

    The number of shares is 1/10 the Merck shares. The Total cost of the drop in the Merck basis. The Date Acquired is when the Merck shares were acquired.

    If the 1/10 ration had generated a fractional shares, there would have followed a Sold Shares transaction for that fractional share with a Total Sale value equal to the cash-in-lieu received. That sale would have dropped the basis of the remaining whole shares of Organon by a small amount. That is, after the sale, the total basis of the remaining Merck and Organon holdings would be less than the pre-spinoff Merck basis.

    One of my key targets for spinoff events is that they be neutral for investment performance. That is reflected in an Investment Performance report which comes out like this:

    image.png

    The point here is not the 114.29% Average Annual Return which is a meaningless value when annualized from a one-month period. The point is that the 528.89 is both an investment and a return on the same day, thus do not impact the Average Annual Return calculation.

    Hopefully, with this example, you can add a RtrnCapX transaction to your records and edit the Add Shares downloaded to match as necessary. I would focus on matching the final basis data and bypass that your brokerage made two adjustments in getting there.

    Part of the reason I am presenting this as extensively as I am is that I am trying to develop a FAQ article to a) clarify common questions and b) inspire Quicken to improve their process.

Categories