Transcripts

"Kevin McCormally's Tax Tips"-How Best To Spin Spin Offs

SUZANNE PRATT: If you haven't started work on your 2007 tax return, there's no time like the present. There are just about two weeks left until April 15, the Federal tax filing deadline. And we're here to help. In tonight's tax tips, our tax guru Kevin McCormally, editorial director of "Kiplinger's Personal Finance," explains how to handle share spin offs and investment settlements.

KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: Tax time probably does more than misbehaving markets to make investors wish you just kept your cash in a mattress. Consider the viewer who wrote last week about a spin off that presented him with shares of Kraft Foods. How was he supposed to report it on his tax returns, as a gift, an inheritance? What? Of course, he doesn't have to report the shares at all, unless he sold them in 2007. And if he did sell, he has the mind-boggling task of figuring out his tax basis in the Kraft shares. That means splitting the basis of the original shares -- Altria, in this case -- between Altria and the spun off Kraft shares.

The proper division depends on the ratio of the price of both companies right after the spin off. In this case, about 76 percent of the basis stayed with Altria, 24 percent migrated to Kraft. Now, if you received shares in a spin off, look to the shareholder services offices for help on this thorny issue.

And then there's the viewer who received a check last fall as the settlement of a security fraud lawsuit against Royal Ahold. Since he no longer owned the stock, he assumed he should report the money as other income and pay tax on it in his top bracket. But that would be a costly mistake. He should actually report the settlement as a capital gain and include a note with his return that it's a recovery related to a sale reported on an earlier return. If you get such a settlement while you still own a stock, you report nothing that year, but you're supposed to reduce your basis by the amount of the settlement.

Now, please remember I don't make the rules. I just try to explain them. I'm Kevin McCormally.