Wednesday, May 25, 2011

Motorola Spinoff

At the beginning of 2011, Motorola Incorporated was split into two companies: Motorola Solutions and Motorola Mobility. I have been a long time holder of Motorola stock. When I checked my stock portfolio on TD Ameritrade, I noticed two new stock symbols: Motorola Solutions, Inc. is NYSE: MSI, and Motorola Mobility, Inc. is NYSE: MMI. The old stock symbol MOT has been retired.

This spin off was a little bit more complicated than the usual spinoff. First, holders of the old Motorola Stock (MOT) were given 1 share of Motorola Mobility (MMI) for every 8 shares of MOT that they owned. Then, the remaining MOT shares underwent a 1-for-7 reverse split and the remaining entity was renamed Motorola Solutions (MSI). If this sound confusing, I will work through an example of what happened.

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 MSI and MMI shares that I now own. Also when I finally sell the stock, I will be charged two sets of commissions -- one for Motorola Solutions (MSI) and another one for Motorola Mobility (MMI). The purpose of this post is to work through an example and help readers understand the tax basis calculations.

To start the process, one needs to know the opening prices of MSI and MMI on January 4, 2011 immediately following the spinoff. For MSI, the stock opened at $37.30 on January 4. For MMI, the stock opened at $31.17 on January 4. To further complicate matters, we need to adjust the stock prices to account for the split ratio from the original Motorola (MOT) stock. To do this, we need to divide the prices of MSI and MMI by 7 and 8 (the split ratio), respectively. For MSI this is ($37.30/7) = $5.33, and for MMI this is ($31.17/8) = $3.90.

Knowing this information, we can calculate the percentage of the original Motorola (MOT) cost basis to allocate to each of the two new stocks. For MSI, this is $5.33/($3.90+$5.33) = 57.75%. And for MMI, this is $3.90/($3.90+$5.33) = 42.25%. Note that the denominator in each case ($3.90 + $5.33) = $9.23 represents the value of a single share of the original Motorola (MOT) at the opening on 1/4/2011. MOT closed on 1/3/2011 at $9.11, so in essence Motorola stock gained 12 cents in value at the time of the spinoff.

Okay, so we've made it this far. Now, let's work through an example. Suppose that you owned 1000 shares of MOT that you bought at $8 per share ($8000 total cost basis). Following the distribution, you would end up with (1000/7) = 142.857 shares of MSI, and (1000/8) = 125 shares of MMI. Using the ratios that were calculated above, the allocated tax basis for MSI is (57.75% * $8000) = $4620. And the allocated tax basis for MMI is (42.25% * $8000) = $3380.

I've seen that people often do web searches using terms like "Motorola spinoff cost basis." Unfortunately, you won't be able to find your cost basis in this way as everybody's situation is different. Your own cost basis has to be calculated for your personal situation.

I will note that most cases, you will end up with fractional shares of either MSI or MMI after the spinoff. (The only exception is if the number of original MOT shares you owned was a multiple of 56 shares.) In this case, there is also a small portion of the cost basis that may be paid out as "cash in lieu" (CIL) of fractional shares. For cash-in-lieu, you would subtract that amount from the portion that is allocated to each stock.

Motorola investor relations has a webpage with additional information about the spinoff. It is located here:

In the case of my brokerages, both TD Ameritrade and Morgan Stanley Smith Barney calculated the cost basis for me. In both cases, there was a slight difference between what my the basis would be if I calculated using the method above. My suggestion is that if your broker already calculated the the basis for you, you should go with that number unless you believe that they made a mistake in the process.

One last note is the question of whether the cash-in-lieu (CIL) distribution is taxable. In general, CIL received for fractional shares of stock is a taxable event. However last year, after Verizon spun off Frontier, I received 6 cents in CIL that was not reported. However, I got this message from my broker: "A cash-in-lieu payment is reported on Form 1099-B if the payment exceeds $20. If your payment was less than $20, it is not reportable."

So, is this explanation as clear as mud?

Update 1: On August 15, 2011, Google Inc. announced that it plans to acquire Motorola Mobility (MMI) for $40 per share in cash. They expect this transaction to close by the end of 2011 or early 2012. The acquisition will, of course, require regulatory approvals in the US, the European Union and other jurisdictions, as well as the approval of Motorola Mobility shareholders.  But if everything goes through, this will provide a closing transaction for MMI shareholders.  It will also require the selling stockholders to calculate their tax basis as this type of cash acquisition generally triggers a taxable event.

Update 2: For information about reporting the Motorola spin off on your taxes, see this post: Do I Need to Report the Motorola Spinoff on My Taxes?

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.