Questions and Answers Figuring the cost basis for shares in a spin-off. With the new tax law, how will my investment income be taxed?

Q. As a longtime Merck shareholder, I recently received shares in the company's spin-off, Medco Health Solutions Inc. How do I calculate my cost basis in these two holdings?

A. On August 19, Merck spun off Medco to all shareholders of Merck as of August 12. You should have received 0.1206 share of Medco for each share of Merck that you owned on August 12.

However, only whole shares of Medco were issued. So if you were entitled to a fractional share, you should have received a check to cover the value of the fractional share.

To determine your cost basis for your Merck and Medco shares, you must first know your original cost for the Merck shares. Once you have determined your original cost, you simply apply 94.65% to arrive at your new cost basis for your Merck shares, while the remaining 5.35% becomes the cost basis for the Medco stock you received. The 94.65/5.35 ratio is based on the market prices of the...