Spinoffs
Chapters in this video
- 0:00 Why Carla thinks she got free stock (she did not)
- 1:10 Spinoff definition: no cash outlay, two companies from one
- 1:59 Splitting the cost basis: reallocation, not magic
- 2:52 The pizza method: relative fair market value example
- 3:46 Tax-free spinoff: IRC provision and deferred taxes
- 4:43 Holding period tacks on: long-term from day one
- 5:10 The three strict rules: 80%, five years, no earnings device
- 6:09 Rapid-fire exam recap
What this video covers
- Why a spinoff is treated as a dividend distribution at no cost, yet the shareholder's wealth does not increase
- How the parent company's stock price adjusts downward to reflect the carved-out subsidiary value
- The correct method for splitting original cost basis between parent and subsidiary using relative fair market value (FMV) immediately after distribution
- Why a shareholder NEVER receives free zero-cost-basis stock, and how to spot this trap in disguise
- The tax-free spinoff provision of the Internal Revenue Code (IRC): no gain or loss recognized at distribution, with tax consequences deferred until sale
- How the parent's holding period tacks on to subsidiary shares from day one, including the short-term versus long-term capital gain implication
- The three strict qualification requirements: 80% minimum distribution of subsidiary stock, five years of active trade or business for both entities, and prohibition on using the spinoff primarily as a device for distributing earnings
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