My grandfather has a candy-apple red 1927 Ford Model T in perfect condition sitting in his garage. Just recently he told me that he's thinking of getting rid of it. Why? "While it brings back nice memories, it's starting to collect dust," he says.

I guess that's how

Ford

(F) - Get Report

shareholders feel.

Over the last two years, Ford stock is up 9.3%, while the

S&P 500

index is up more than triple that, around 31%. With approximately 1.2 billion shares of Ford stock outstanding, that makes for a lot of disappointed investors.

Last month, the company decided to take action and "enhance" shareholder value via two stock transactions. In the first, the No. 2 automaker will reorganize the company and replace existing shares with new shares and cash (or additional shares instead of cash). The second transaction is the spinoff of

Visteon

, its $19 billion auto-parts supplier. Ford still is awaiting

Securities and Exchange Commission

approval on both transactions.

Meanwhile, there are some lurking tax concerns.

The Shares

Following Ford's reorganization, the timing of which is uncertain, the company will exchange Ford common and Class-B shares for new Ford common and Class-B shares. "It's essentially a brand-new share," says Karen Hampton, Ford's spokeswoman. Your holding period for the new Ford shares will be the same as that of your original Ford shares.

Fortunately, the exchange of old voting common stock for new common stock qualifies as a "tax-free recapitalization," according to

Internal Revenue Service's

Revenue Ruling 8625. So this stock swap is tax-free.

Shareholders also will have the option of receiving either $20 in cash per share or the equivalent value in the new Ford shares. This cash distribution is limited to $10 billion.

Let's say Ford stock is trading at 60 on the date of transfer. If you own one share, you'll get one 40 share of the new stock then have to chose between another $20 in stock or $20 in cash.

If you elect to take the cash, you'll owe taxes on it, assuming your Ford shares have appreciated, but the good news is that you will pay capital gains tax on this extra cash, not ordinary income tax, as you would on a dividend distribution. (The long-term capital gains rate is a maximum 20%, while ordinary tax rates range as high as 39.6%.)

Why? "Think of it like this: They give you stock and you turn around and sell a piece of it," says Janice Johnson, a partner at

American Express Tax & Business Services

in New York. Hence the capital gains tax.

If the cash is taxable, why take it? "A lot of people are very frustrated with Ford," says Johnson. The stock has not performed lately and this may be a great way to get out of the shares and invest in a new favorite. Approximately 40% of the shareholders are expected to take the cash, according to the company.

Shareholders will receive a proxy statement within the next few weeks asking them to vote on this reorganization deal. Odds are good it will pass.

Once it's approved, shareholders will get a card in the mail asking whether they want extra stock or cash, says Ford's Hampton.

The Spinoff

The second transaction is the spinoff to Ford shareholders of Visteon, the supplier of integrated automotive systems.

Each shareholder will receive approximately one share of Visteon for every seven or eight Ford shares they own on the record date, according to analysts. The record date will be established after the SEC approves the deal.

The cost basis in the Visteon shares will be computed by allocating the cost basis of the Ford shares owned at the time of the spinoff. Fortunately, Johnson helped us out with an example:

Let's say you originally paid $50 for a Ford share in November 1999 (that's your original basis), and the value of Ford is $70 before the spinoff of Visteon. Because analysts say Visteon is valued at around $5 per share, Ford's stock should slip to 65 after the spinoff.

So you have to split the original basis of your $50 investment between your Visteon and Ford shares. In this example, the basis in the new Visteon shares would be 5/70 of the $50, or $3.57. The other 65/70, of the original $50 investment, or $46.43, would be the remaining basis in the Ford shares after the spinoff.

The holding period for these Visteon shares will be same as that for the original Ford shares, assuming this deal qualifies, as expected, as a tax-free spinoff, says Johnson.

The timing of these two transactions is still uncertain. "It is very possible that the Visteon spinoff will happen first," notes Hampton.

Either way, it is important to note that if you elect to take the cash, not only will you likely be hit with capital gains tax, but you'll wind up holding fewer shares of Ford. If the Visteon spinoff happens after that stock swap, that will mean fewer shares of Visteon as well.

On the other hand, taking the cash and buying a few shares of your new favorite stock may be a great way to get the dust out of your portfolio.

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