Sorrento Therapeutics distributed shares of Scilex Holdings that it owned to its shareholders. The structure of the spinoff was the distribution of Scilex Holdings shares as a taxable dividend. The distribution ratio was 0.1410127 shares of SCLX for each SRNEQ share. Form 8937 indicated the value of each SCLX share to be $10.48

The IRS form 8937 regarding the cost basis allocation of this transaction can be found at this URL: https://scilexholding.gcs-web.com/static-files/1017fca8-41b7-4e47-bc26-4f1ff5757c8f

Resolution:

This action will need at least two entries in the accounting software.  The information below is based on the information available from Scilex. To be considered a dividend the value of this distribution must come from retained and current earnings. If SRNEQ does not have enough earnings, some or all of this distribution will be considered a return of capital. Form 8937 stated the distribution should be considered a non-taxable return of capital as Sorrento does not have sufficient retained earnings for this distribution to be a dividend. This return of capital decreases the cost basis in Sorrento. If the distribution is large enough a capital gain will be realized.  If this information changes you will need to adjust the nature of the distribution at a later date.

The Dividend/Return of capital Entry

Go to Accounting > Securities > Cash Distribution in myICLUB. Here is the information you need to complete the dividend entry.

• Symbol : SRNEQ
• Payout Date: 1/19/2023
• Ex Dividend date : 1/19/2023 ( A return of capital really needs no ex-div date.)
• Type : Return of capital
• Amount: [10.48 x 0.1410127  x  (# of SRNEQ shares owned)
  • # of SCLX shares received = 0.1410127 x (# of SRNEQ shares owned)
  • 10.48 = value of one SCLX share from form 8937.
  • For example, if you owned 100 shares of SRNEQ your amount would be
  • 10.48 x 0.1410127 x 100 =  147.78

Save the transaction and the return of capital has been entered.

The Buy Entry

Go to Accounting > Securities > Buy in myICLUB. Here is the information you need to complete the buy:

• Date: 1/19/2023
• Select Security :  Scilex Holdings (SCLX)
• Number of Shares Bought :  0.1410127   x (# of SRNEQ shares owned).
  • For example, if you owned 100 shares of SRNEQ your amount would be
  • 0.1410127 x 100 =  14.1013 shares (Round at 3 or 4 decimal places.
• Net Total of Purchase: Use the same value as the Amount from the return of capital entry above.
  • Be sure to use the same cash account for the Return of capital entry and the Buy entry.

If your buy transaction included fractional SCLX shares, continue to the next step. If not, you are done with this spinoff.

The Sell Entry

Go to Accounting > Securities > Sell in myICLUB. Here is the information you need to complete the sell:

• Date: 1/19/2023
• Select Security :  Scilex Holdings (SCLX)
• Number of Shares Sold :  The fractional part of the shares bought in the Buy Transaction.
• Net Proceeds: Use the cash-in-lieu amount from your broker statement.

When saved you are finally done with all transactions related to this spinoff.

NOTE: It is possible you will need to edit the distribution (return of capital) entry after receiving information from SRNEQ and/or SCLX on the true nature of the distribution. This determination will be done at the end of the tax year for SRNEQ. Rather than a return of capital it may be part dividend and part return of capital. If the distribution was entered, and remains all return of capital, myICLUB may change part or all of the return of capital into a capital gain. This will happen if your cost basis in SRNEQ is less than the value of the return of capital distribution.