When I last updated my E*TRADE stock portfolio in Microsoft Money, I was surprised to find that a new stock had been added to my portfolio. I was now the owner of 48 shares of Frontier Communications (NYSE: FTR) that I didn't purchase. E*TRADE is not in the habit of giving away free stock, so I figured that there must be another reason. I turns out that this stock is due to the spin off on July 2, 2010 of Frontier shares from Verizon Communications (NYSE: VZ) which I own.
I usually don't get too excited about spin offs because they require me to re-calculate the tax basis of the stock shares that I own. In this case, I need to find the cost basis for both the Verizon and Frontier shares that I now own. Also when I finally sell the stock, I will be charged two sets of commissions -- one for Verizon (VZ) and another one for Frontier (FTR). Thankfully, I was able to find a tax-basis document
on the Verizon investor relations website that can help with the tax basis calculations.
The gist of the document is that an owner of Verizon shares prior to the spinoff would allocate 93.7989% of the cost basis to Verizon shares. And 6.2011% of the cost basis would be allocated to shares of Frontier. There is also a small portion of the cost basis that may be paid out as "cash in lieu" (CIL) of fractional shares. If you received case in lieu, you would subtract that amount from the portion that is allocated to Frontier.
Using my own case as an example, I own 200 shares of Verizon. My original cost basis for the 200 shares of Verizon was $6705.00 (including commissions). This works out to $33.53 per share. So after the spinoff, 93.7989% of that amount or $6289.22 is attributed to the 200 shares of Verizon that I own (the new cost basis is $31.45 per share). The portion that is allocated to the 48 shares of Frontier is 6.2011% or $415.78. However, I did receive $0.06 (6 cents) of cash-in-lieu, so I would decrease my Frontier basis by that amount. My cost basis works out to $8.66 per share of Frontier. I have updated these values in MS Money, and will use these as the basis for whenever I decide to sell my shares.
Note that I did notice a few minor errors in the document
provided by Verizon investor relations. I plan to contact them about these errors. But for the most part, these errors would not affect your calculations. So, is this explanation as clear as mud?
See Also: Trade Triangle: Frontier Communications (FTR)
For more information about the Frontier spin off see also: Update on Verizon Frontier Spin Off
I did contact Verizon investor relations about errors in their document. I have an early version that had some calculation errors and several typos. After Verizon received my message, they updated the PDF document on their website, giving it a new name: "VZ-FTR Cost Basis_V3.pdf". Presumably this is "version 3" of the document. I have updated the links in my post to link to the most current Verizon document.
For reference, I am also including a link to the older cost-basis document
without a "V3" in the name. If you examine the second page of this document, you will find that the text refers to an incorrect cost-basis for Frontier of $7.501. Another typo in the second paragraph of the example is that it ends with the term "Frontier sock." This should read as "Frontier stock."
Disclaimer: The example provided here is for illustrative purposes only. I am not providing tax advice, and I encourages readers to consult with a tax adviser if they have specific questions about cost basis calculation.