One possible approach is to utilize the New York Stock Exchange closing price on November 4, 2021 (the first trading day immediately after the Distribution), for IBM common stock ($120.85 per share) and for Kyndryl common stock ($26.38 per share) as the fair market value. At a distribution rate of 1:5, the weighted value of the distribution would be $5.28 ($26.38 / 5) worth of Kyndryl stock for every share of IBM stock. Therefore, you would allocate 4.18% ($5.28 / ($120.85 + $5.28)) of your tax basis in your IBM shares immediately prior to the Distribution to the Kyndryl shares received in the distribution and allocate 95.82% ($120.85 / ($120.85 + $5.28)) of your tax basis to your IBM shares. As this is just one of many approaches, you should consult with your own tax advisor to assess appropriate methodologies in this regard.
this means 4.18% of the cost of each purchase of IBM would be allocated to KD
if all the shares of both stocks were sold at the same time it probably wouldn't matter that cost was not allocated unless the shares are held by a broker which may do a cost allocation but only for the share it held. Whether a DRIP would do this is unknown.
however, if sold at different times there would certainly be a tax issue. if you sold IBM but not KD, the IRS could argue you have understated your income because you overstated the IBM cost. if so you may get hit with penalties interest and the additional taxes.
if you never sell either then it's not going to matter because your heirs would get the stocks based on FMV on the date of death.
if you sold KD say year 1 and IBM year 5 and the IRS caught the cost issue in year 5, they could increase your taxable gain in year 5 but since year 1 is beyond the statute of limitations they could not reflect the allocated cost to KD in year 1. thus any benefit to a higher cost than reported for KD would be permanently lost.
a spreadsheet would help in doing the calculations and you don't need to pay MS. if you don't have a spreadsheet program there are free versions of programs like Excel available.
