AT&T shares have risen 10% since April 8.
Stefani Reynolds / AFP via Getty Images
spinoff of its 71% stake in
Warner Bros. Discovery
to its shareholders on April 8, many
investors have considered selling their Warner Bros. stock to buy more AT&T to get higher income.
Calculating the cost basis of AT&T (ticker: T) and
The good news for any AT&T holders selling their Warner Bros. stock is that their cost basis is calculated based on when they bought AT&T shares, not the date of the spinoff.
This means that any gains or losses will get favorable long-term capital-gains treatment if the investor held the AT&T stock for at least a year. Given that AT&T stock has done poorly over the past decade, many holders selling AT&T or Warner Bros. stock will experience a loss for tax purposes.
On Thursday, AT&T shares were up 3.4%%, to $20.01, in the wake of the company’s first-quarter earnings report late Wednesday. The shares have risen 10% since April 8, and now yield 5.7%.
Warner Bros. Discovery stock, which was up 0.4%, to $23.10, on Thursday, has no dividend and the company has no current plans to pay one as it focuses on debt reduction. Warner Bros. stock is off 5.4% since the spinoff amid concerns about the ultimate size and profitability of the streaming market after Netflix’s (NFLX) disappointing results earlier this week.
Many AT&T holders are income oriented given the stock’s high yield and have sold their Warner Bros. stock to buy more AT&T shares or are thinking about doing so.
In the wake of the spinoff, Raymond James analyst Frank Louthan wrote that the “uptick following the spin could be driven by investors buying more shares of T to replace some lost dividend income.”
In our article after the spinoff, Barron’s wrote that the tax basis should be calculated based on the closing price of the AT&T and Discovery on Friday April 8, the date of the distribution of the Warner Bros. Discovery stock to AT&T holders.
While Internal Revenue Service guidelines aren’t specific on the date to be used for calculating the basis, the more relevant date could be Monday, April 11, the first day of trading following the spinoff.
Here’s what New York tax expert Robert Willens told us:
“Usually, for tax purposes, the date of distribution is the controlling date. Frequently, that will coincide with the first day of trading as independent companies. If, however, there is a time lag then, yes, you would use the latter date, the date as of which the stocks trade independently of one another. The I.R.S. regulations are not crystal clear on this point. They say that the basis should be allocated “in proportion to the fair market value …” The regulations, however, do not specify the date on which those fair market values are to be determined.”
Willens says that to calculate the tax basis, an investor would need to use the average of the high and low prices of AT&T and Warner Bros. Discovery on April 11.
That was $19.31 for AT&T and $24.88 for Warner Bros. Discovery based on trade data shown by Fidelity Investments.
To calculate the basis, an investor first would multiply the spinoff ratio of roughly a 0.242 share of Warner Bros. Discovery for every AT&T share times $24.88 (the average WBD price on April 11) to get about $6 of Warner Bros. stock per AT&T share.
That figure would be divided into the sum of the AT&T average price and the WBD spinoff value ($6 divided by $25.31) to arrive at the percentage of the original AT&T cost that should be attributed to Warner Bros.
That figure is about 24%, meaning that 24% of an investor’s cost would be attributable to Warner Bros. and 76% to AT&T.
So if an investor had originally paid $30 for AT&T, roughly $7.13 (24% of $30) would be attributed to Warner Bros. and $22.87 to AT&T (76% of $30). Barron’s had calculated the percentages as roughly 25% and 75% in our April 11 article.
It gets even more complicated if any an investor bought AT&T in several transactions
“If you own several blocks of T stock, you have to make this computation on a block-by-block basis,” Willens told Barron’s in an email. “You can’t simply aggregate the blocks of stock you own. Instead, each block of T stock is considered separate from any other blocks you might own.”
As we wrote on April 11, investors who bought equal amounts of AT&T at $30 and $24 can’t use an average price of $27 in calculating their cost basis. They can pick which block of stock they want to use when they sell any AT&T or Warner Bros. Discovery stock.
“Sure, you can choose which block of stock to sell,” Willens wrote. “You just have to specify to your broker which block of stock you wish to sell, and the broker is then required to confirm the choice you made in a written document given to the client within a reasonable time after such specification is made. Such specification can be confirmed by the broker on the client’s monthly statement, for example. That is called ‘specific identification’ and it is respected for tax purposes even though stock from a different block is actually transferred to the purchase.”
Investors probably should consult their own tax advisors on the matter given the complexity.
Write to Andrew Bary at firstname.lastname@example.org