SPINOFF: Orchard Supply and Orchard Preferred from Sears Holdings

Issue: How do I enter the spinoff of Orchard Supply and Orchard Preferred from Sears Holdings?

Cause: Sears Holdings spun off Orchard Supply (OSH) and Orchard Supply Preferred (OSHSP) effective 12/30/2011. The first trading day for OSH and OSHSP was 1/3/2012.

Resolution:
This action is better entered as 2 spinoffs entries in the accounting software. Cash-in-lieu of fractional shares will be received for 2 securities, separating this into 2 spinoffs will allocate the cash received better in 2 transactions. The information below is based on the information available from Sears and Orchard Supply. The remaining basis fractions were calculated from the opening prices of OSH, OSHSP and SHLD on 1/3/2012. This transaction has some complications related to the OSHSP shares.

Be sure to read the entire posting before entering your transactions.

The First Spinoff Entry
Go to Transactions > Spinoff or Accounting > Securities > Record spinoff of securities depending on the version of the software being used. If you are unfamiliar with spinoff transactions you can get help at this URL:
http://www.iclub.com/support/kb/default.asp?page=normal_spinoff
Here is the information you need to complete the first spinoff.

Date: 12/30/2011
Select Parent Security (or Parent Company) : Sears Holdings (SHLD)
Remaining Basis Percentage: 96.58
Spinoff Security (or Symbol of New Company) : Orchard Supply Hardware (OSH)
Shares received : 0.04512 x (#of SHLD shares owned) (Remember to include fractional shares.)
For example, if you owned 100 SHLD shares, you should receive .04512x 100 = 4.512 OSH shares.
Price Per Share : 25 (OSH)
Cash received: See your broker statement for cash-in-lieu received
Save the transaction. This transfers the basis for OSH and OSHSP from SHLD to OSH shares.
The Second Spinoff Entry
Go to Transactions > Spinoff or Accounting > Securities > Record spinoff of securities depending on the version of the software being used.
Here is the information you need to complete the second spinoff.
Date: 12/30/2011
Select Parent Security (or Parent Company) : Orchard Supply Hardware (OSH)
Remaining Basis Percentage: 98.23
Spinoff Security (or Symbol of New Company) : Orchard Supply Preferred (OSHSP)
Shares received : 0.04512 x (#of SHLD shares owned) (Remember to include fractional shares.) This should be exactly the same as the OSH shares received in the first spinoff.
For example, if you owned 100 SHLD shares, you should receive .04512x 100 = 4.512 OSHSP shares.
Price Per Share : 0.45 (OSHSP)
Cash received: Do not enter anything here. The cash in-lieu for the preferred shares has a different tax treatment. See below for how to enter the cash-in-lieu.
Save the transaction.

You can check the basis of the securities post spinoff. SHLD should have 96.58% of its pre-spinoff basis.
OSH should have about 3.36% of the SHLD pre-spinoff basis and OSHSP should have about 0.06% of the SHLD pre-spinoff basis. OSH and OSHSP will have a bit lower amount as their final cost basis because part of their basis will be decreased by the basis of the fractional shares sold for the cash-in-lieu received.
To enter the cash-in-lieu of OSHSP fractional shares you need to enter it as a dividend. Go to Transactions > Dividend or Distribution or Transactions > Cash Dividend depending on the version of the software you use.
Here is the information needed to enter this transaction:
Date: 12/30/2011
Amount: See your broker statement for cash-in-lieu for the OSHSP shares. Also look for dividend payments as your broker may classify them as such since the cash is taxable as a dividend.
Security: Sears Holding (SHLD) This may change with more information. The tax code indicates the source should be treated as if you received cash instead of the OSHSP shares. Since you received the OSHSP shares from SHLD, if you substituted cash for the OSHSP shares the source would be Sears Holdings (SHLD).
Ex-dividend date : 12/30/2011 This also may change with more information. This is the effective date of the transfer of OSHSP interest out of Sears Holdings. Trading of all securities involved did not begin after the spinoff until 1/3/2012.

The Orchard Supply Preferred shares have an accounting complication related to them. The proceeds from the sale of the fractional shares are treated as a dividend. In addition, for any future sale of the OSHSP shares a portion of the proceeds need to be treated as a dividend and not a return of capital. (The program treats the return of your cost basis as non-taxable return of capital when you sell shares.) The amount to be treated as a dividend is the fair market value (FMV) of the OSHSP shares when they were distributed. The easiest, but not the only way, to assess FMV is to use the opening price of the shares when they first start trading after the distribution. This price was $0.45 per OSHSP share. So when the OSHSP shares are sold a special work-around will be needed so that the first 45 cents per share of the sale proceeds is treated as a dividend.
There is an exception to this rule. The exception is if you sell ALL interest in Orchard Supply when the OSHSP shares are sold. So, if you sell all your OSH and OSHSP shares together no special work-around will be needed.