Tax-Free Spinoff

  

Categories: Tax, Stocks

The media business seems to do these all the time.

Discovery was hooved inside of the thick walls of traditional companies, from Liberty Media managing it, to it then being distributed by the cable systems owned by Time Warner, Cox, Comcast, Cablevision, and the others. Then, when Discovery grew up (and bifurcated into The Discovery Channel and Discovery Education), the company gained essentially full independence by being spun off, tax free, in the form of a distribution of its shares of stock to its owners.

That is, if you owned 1,000 share of Time Warner (way bigger company), then, upon executing the tax free spin, you'd receive 12 shares of Discovery. Those 12 shares are not taxable to you until you then sell them for cash. Tax-free spins are not taxable because they're essentially barter deals, i.e. like-for-like exchanges.

So here's to tax-free (and here's to Shark Week!).

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Finance: What is Aftertax Yield?8 Views

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Finance a la shmoop... what is after-tax yield, well we'll presume you [Yield definition on 100 dollar bill]

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know what standard yield is yeah okay so you have a stock trading for a

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convenient exactly 20 bucks a share it pays a quarter a share four times a year

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is a dividend or a dollar a year total in dividends its dividend yield is one

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over twenty or five percent right you buy share for 20 bucks you get a dollar a

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year back but you the investor pay tax on that buck a share of sweet hot

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dividend love if you're a 35 percent bracketed taxpayer that is you pay 35 [35% taypay circled]

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percent tax on the last dollar of your income well then you only keep 65 cents

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on each dollar of dividend income that you receive and yes we note that there

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is both federal and state and you know sometimes other taxes that go in here [List of taxes on sticky note]

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like the Obamacare flavors or other county taxes but in total we're just

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saying let's make up a story here that if you pay 35 percent tax on that buck

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then your real after-tax yield is a lot less than the 5 percent the company

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distributes to you, you calculate your after-tax yield by replacing that

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"gross" dividend of a buck with a 65 cents of dividend that you keep [After-tax yield calculation]

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after-tax in the numerator like that and then that 20 bucks you paid per share of

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gently-used pacemakers dot-com stays in the denominator down there it looks like

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this 65 cents divided by 20 bucks and that's 3.25 percent that

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is 3.25 percent is your after-tax yield so that's as it applies [Man discussing after-tax yield to stock]

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to stocks what about as it applies to bonds well in a way this calculation

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matters a lot more because there's an entire industry in muni-bonds which pay

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lower total rates of interest but which are generally insulated from paying [Person holding a muni-bond]

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taxes so in a way muni bonds compete against fully taxable corporate bonds

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for your bond investing dollar well tax rates for qualified dividends

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meaning they're qualified for the various deductions from equity

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investments are usually meaningfully lower than ordinary income rates so

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let's look at the individual paying 35 percent marginal tax on long [Magnifying glass focuses on womans face]

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term investment gains well they're likely paying something close to 50% tax

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on ordinary income so we have a tale of two bonds foam depot corporation whose

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bonds pay 7% and we're in the muni-city muni bonds which pay 4% which is better

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the two bonds are of identical credit risk and if you're Joe hard-worker high [Hoe hammering a roof]

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tax payer and supporter of government pork then which of these two bonds gives

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you a better after-tax yield well if you pay 50 percent ordinary income tax then

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you're 7% on that corporate is half or 3.5% after-tax that's the after-tax

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yield got it and your muni bond carries no tax liability to you so the 4%

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gross is the four percent net as well answer well go with the muni bond

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and you two will be you know in the muni [Man discussing muni-bond after-tax yield and hat lands on his head]

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