Calculating adjusted cost basis after Kyndryl spin-off

Forum|Forum|4 years ago
November 24, 2021
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From reading the Form 8937 posted after the IBM to Kyndryl spin-off, I am required to calculate the adjusted cost basis of each lot of IBM stock issued to me. I started to receive shares in the 1960's and with dividend reinvestment, stock splits, etc. this would result in about 560 separate calculations. I have kept careful records of my cost basis for every transaction and stock split, but it sounds like I cannot use my accumulated cost basis and apply the percentages given in the Form 8937 for a single calculation of the new cost basis. Since this is supposed to be a zero sum tax event and the total adjusted cost basis for the IBM and new Kyndryl stock will equal my previous IBM cost basis, would the IRS accept me leaving my current IBM cost basis as is and applying $0 to the new Kyndryl stock? Or are there other suggestions to avoid trying to complete 560 IBM and Kyndryl cost basis calculations? Thank you.

Not A Product Question

Best answer by Mike9241

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.

M

Mike9241

Answer

Level 15

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.

fanfare

Level 15

When you sell shares, the proportional calculation applies to every lot and every reinvested dividend that is disposed of. shares are sold First In, First Out.

Since you said you have careful records over all time, I don't see why you should have any problem.

the proportion factor is not going to change in the future.

Future reinvested dividends or shares purchased will not be affected.

If you plan to never sell, this is all moot, unless Congress eliminates the step up basis for heirs, which is something they want to do.

T

Tim2900

Level 2

You sound like an IBM lifer like my dad was. I just went through all of those old papers (including stock distributions reported on punch cards - seems like they used those for everything). I was looking for an answer to the Kyndryl question and found this thread. I don't have an answer, but just thought I'd say hi.