FOOL GLOBAL WIRE
By Dale Wettlaufer (MF Raleigh)

The Final Word in the AT&T Spin-Offs *

ALEXANDRIA, Va., February 4, 1997/FOOLWIRE/ --- Before investors start focusing entirely on the prospects of the individual corporations arising from the spin-offs from AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, there are just a few little details that should be cleared up.

NCR. As the last major piece of the spin-offs from AT&T, NCR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NCR)") else Response.Write("(NYSE: NCR)") end if %> shareholders should have received by now either notice of shares registered in their name or a check for fractional shares. The spin-off was a 1-for-16 ratio, meaning shareholders will receive one share of NCR for each 16 shares of AT&T. For those holding less than 16 shares of AT&T, their situation has been handled differently.

If a Fool purchased 100 shares of AT&T on December 2, 1996 at $39, the entire cost of that purchase (figuring in the commission) was $3,925. That Fool then allocates 95.23% of the purchase price to the 100 shares of AT&T they now hold. That's (0.9423 x $3,925) / 100 shares, or ($3,698.54) / 100 = $36.98 per share. The rest of the purchase price, or 4.77 of the original purchase price, should be allocated to the 6.25 NCR shares. That's (0.0477 x $3,295) / 6.25, or ($157.17) / 6.25 = $25.15 per share.

In this case, if a Fool wanted to sell either the AT&T or NCR, either of those would be a short-term gain. The spin-off is a non-taxable event, though.

For those holding less than 16 shares of AT&T before the NCR distribution, shares were sold on their behalf at an average price of $33.157. For instance, if a Fool held 10 shares of AT&T, the 1-for-16 spin-off ratio would bring them 0.625 shares (1 / 16, or 0.0625) x 10 shares. Multiply that by the average selling price mentioned above and that equals dividend income of $20.72.

The Last Word on the Sale of Partial Shares of Lucent. As mentioned in the Lucent Cost Basis article found in the "Foolwire and Specials" section of the Motley Fool, AT&T's agents sold fractional shares of Lucent for who were so entitled after the spin-off of Lucent. The average selling price on those shares was $43.4645.

What If a Fool Bought Before the Lucent Spin-Off? Uh-oh. Good luck. Actually, we've got the somewhat-simple answer right here. You're going to do the above calculation based on the adjusted cost basis of the AT&T shares as laid out in the Lucent Cost Basis article. If you don't want to hyperlink over there, though, let's just go through an entire example here.

Say our Fool bought 100 shares of AT&T on August 8, 1996 for $41, or $4,125, including commissions. When the Lucent spin-off took place, a Fool adjusted the cost basis by allocating 72.01% of that cost to the AT&T shares and 27.99% to the Lucent shares. So, the AT&T cost basis came out at ($4,125 x 0.7201) / 100 shares, or ($2,970.41) / 100 = $29.70 per share.

The AT&T shareholder received 0.324084 shares of Lucent for each AT&T share, thus bringing this Fool's total to 32.4084 shares. So, the cost basis is ($4,125 x 0.2799) / 32.4084 shares, or ($1,154,59) / 32.4084 = $35.63 per Lucent share. Unlike the NCR spin-off, however, fractional shares of Lucent were sold on the shareholder's behalf and the sale of those shares represented either a long or short-term capital gain or a long or short-term capital loss.

In this case, the Fool's 0.4084 shares were sold at the average price of $43.4645, or $17.75. The cost basis of those shares was (0.4084 shares x $35.63), or $14.55. This Fool would take realize a short-term capital gain of $3.20.

Wrapping It Up. If the investor bought before the Lucent spin-off, you've just adjusted the cost basis of the AT&T shares and you're ready to figure out the cost basis of the AT&T and NCR shares following the NCR spin-off. In this Fool's case, the cost is found by allocating 95.23% of the cost to the AT&T shares as laid out above. That's (0.9523 x $2,970.41) / 100 shares, or ($2,828.72) / 100 = $28.29 per AT&T share.

4.77% of the that cost will be allocated to the NCR shares, so (0.0477 x $2970.41) / 6.25 shares, or ($141.69) / 6.25 = $22.67 per share. Depending on when the you sell these, you'll take a short or long term capital gain or loss. In the meantime, this isn't a taxable event.

More Info. AT&T's Investor Relations page, and their FAQ list in particular, are the handiest places for finding phone numbers and further guidance on these matters.

*A Final Note. We're not tax consultants, so this should not be taken as professional tax advice. The aim here is to share our understanding of the situation with all the Fools wandering the planet. If anyone has anything to add to this understanding, we welcome the input.

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