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Newcastle Investment Corp. Message Board

  • clawsmeister clawsmeister Jan 30, 2013 10:09 AM Flag

    Spinoff tax question pretty straightforward

    What NCT is doing is splitting the company up. At the appropriate time, NCT will issue data on what percentage of your original investment is the cost basis for NCT and what percentage is the cost basis for New Residential.

    As an example, when HP spun off Agilent the cost basis was roughly 78/22

    I'm not a tax professional, so don't take the following as gospel. I am sure that we will all owe tax on the capital gain portion of any cash received in lieu of fractional shares, but that is peanuts. I don't believe you owe anything on NCT or New Residential shares until you actually sell, and what you owe is based on the difference between the sales price and the cost basis. I have never heard of anybody being taxed on paper gains or losses, but again, I'm not a tax professional.

    Sentiment: Buy

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    • bascot Jan 30, 2013 4:01 PM Flag

      I guess this is one of the advantages of holding this position in an IRA as there is only the standard taxation on withdrawals...

    • This is my fourth spin off of this type. I' sure you are correct.

    • yes, the transaction is pretty straightforward and they've told everyone it is NOT a tax-free transaction. Just because your experience is with tax-free spinoffs (most probably involving C-corps) doesn't mean that every spinoff is tax-free.

      • 3 Replies to marklibera
      • Marklibera,

        This is a spin-off in that NCT will distribute its ownership of excess MSRs (and a few other things) into a sperate entity (tentative stock symbol NRZ). Had NCT sold NRZ and booked capital gains, I could see where taxes would be due. However, IRS Section 355 Code requirements state that for a spin-off to be tax free, it must meet certain conditions. The one condition this transaction fails to meet is the active business rule: "both the parent and subsidiary be engaged immediately after the spin-off in an active trade or business in which each has actively operated for at least five years prior to the divestiture."

        Surely, NCT would not do this if existing shareholders would be subject to huge taxes (and institutional buyers would be selling ASAP). In your experience, do you have any idea about what kind of taxes we might be looking at?

        The other thing that is unknown is the cost-basis adjustment -- which applies only if I were to sell anything. Nevertheless, I had to do a little research. I found this: "To calculate tax basis in the spinoff and parent, the shareholder must allocate his basis in the purchase of shares in the original company pro rata across the two resulting companies, based on the relative fair market values of the parent and spinoff immediately after the separation." The question here is what is fair market value immediately after the spinoff? Apparently, the IRS is of no help; maybe NCT will provide some numbers. Better yet, both companies do so well that I never sell anything. LOL

      • I'm curious. Based on your experience when would stock issued because a company simply divides itself ever result in a tax liability before either stock is sold?

      • New 63 month high.

        Sentiment: Strong Buy

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