Spinoff
A spinoff is a corporate action where a parent company distributes shares of a subsidiary directly to existing parent-company shareholders. After the distribution, parent and spinoff trade as two separate public entities. Generally non-taxable under §355 if the spinoff meets statutory requirements (active business, distribution of control, business purpose, no plan to dispose of either entity). Cost basis allocates between parent and spinoff per the issuer's Form 8937; holding period carries over to both.
Spinoffs are how diversified conglomerates split into focused public companies — Comcast's spinoff of Versant (formerly the cable-network business), 3M's spinoff of Solventum (healthcare), Kellogg's spinoff of WK Kellogg. The transaction is a structured disposition: parent shareholders receive new-entity shares directly (typically a fractional ratio per parent share), with no cash changing hands at the holder level.
The non-taxable treatment requires §355 compliance. The active-trade-or-business test requires both the parent and the spinoff to have actively conducted the same trade or business for 5 years prior to the spinoff. The control test requires the parent to distribute 80%+ of the spinoff's vote and value. The business-purpose test requires a non-tax reason for the spinoff (most commonly: separating businesses with different growth profiles to enable focused capital allocation). Failed §355 transactions are taxable to both the corporation and the shareholders — the latter recognize the FMV of received shares as ordinary dividend income.
The basis allocation is the holders' main accounting task. Form 8937 is filed by the spinoff entity within 45 days, specifying the percentage of pre-spinoff parent basis that allocates to the parent post-spinoff vs. the spinoff. A 75/25 allocation is typical; the actual percentages depend on the relative FMV of the two entities at the spinoff date. Holders should look up the issuer's Form 8937 (typically on the IR site) to verify the broker's basis treatment matches.
B_parent_post = B_parent_pre × α ; B_spinoff = B_parent_pre × (1 − α)- B_parent_pre
- = pre-spinoff parent basis
- α
- = allocation percentage to parent (per Form 8937)
- B_parent_post
- = post-spinoff parent basis
- B_spinoff
- = spinoff lot basis
Pre-spinoff parent basis $2,000, α = 95% (per the issuer's Form 8937). Post-spinoff: parent basis $1,900, spinoff-lot basis $100. Both lots inherit the original acquisition date.Long-tenure synthetic holdings should include spinoff-derived lots — a position held for 10+ years often has been through one or more spinoffs. The spinoff lot should carry the parent's pre-spinoff acquisition date (holding period preserved), the basis allocated per Form 8937, and a flag connecting it to the parent lot for audit trail purposes. Fractional-share cashouts at the spinoff event are common and should produce small deemed-sale entries.
Common pitfalls
- Computing basis allocation from FMV at the spinoff date instead of using Form 8937 percentages — the IRS treats Form 8937 as authoritative.
- Failing to allocate basis when only the parent or only the spinoff is sold — both entities' bases are needed for any future disposition of either.
- Treating fractional-share cashouts as zero-basis sales — the fractional should carry its proportional share of the allocated basis.
- Missing the holding-period carryover for the spinoff lot — it inherits the parent's acquisition date.
Examples
Unlike a pro-rata spinoff, the 2013 Pfizer/Zoetis separation was a split-off structured as an exchange offer: Pfizer shareholders could elect to exchange Pfizer shares for Zoetis shares at up to 0.9898 ZTS per PFE tendered. A holder who tendered 100 PFE ($2,000 basis) received ~99 ZTS; under §358 the $2,000 basis carried over to the Zoetis shares (~$20.21/sh) with holding period tacking from 2010. A holder who did NOT participate kept all 100 PFE unchanged — no new shares and no basis change. Because a split-off surrenders parent stock rather than layering a pro-rata distribution on top of it, there is no cross-position basis allocation between PFE and ZTS.