How do I figure my cost basis for 3Com (COMS) and Palm (PALM) when the spinoff is complete this summer? 3Com announced that shareholders of 3Com would get 1.5 shares of Palm.

-- Steven Utley


Holy Palm confusion, Batman.

To start, nothing is in stone. 3Com has said that it


give you 1.5 shares of Palm for each 3Com share you hold. The company still is waiting for the

Internal Revenue Service

to grant this spinoff tax-free status. A decision isn't expected until the summer, says 3Com spokesman Mark Plungy.

To spin off Palm in a tax-free transaction, 3Com must meet a laundry list of rules outlined in

section 355 of the tax code. Among the requirements is that 3Com have a majority control of Palm immediately prior to the spinoff, that the spinoff is for legitimate business purposes and that both 3Com and Palm have been engaged in business for at least five years.

Although IRS approval is likely, if would be disastrous if 3Com announced final terms and the spinoff wasn't approved, says Robert Willens, a managing director and strategic tax guru at

Lehman Brothers

in New York. So sit tight and wait for the IRS decision.

Only at that point will you know how many shares of Palm you'll be receiving. There's a good explanation of all this in the

TheStreet Recommends

investor relations section of 3Com's Web site:

The final ratio will be based on the number of shares outstanding of each company at the time of the distribution. If such ratio were to be calculated based on current outstanding shares, 3Com shareholders, as of the distribution date, would be eligible to receive approximately 1.5 shares of Palm for each share of 3Com.

How'd they get 1.5?

3Com owns 532 million shares, or approximately 95%, of Palm. There are roughly 349 million shares of 3Com common stock outstanding. So 532 divided by 349 equals approximately 1.5.

Assuming the IRS approves the spinoff as tax-free, the shares essentially are a gift to 3Com shareholders. And you won't have to worry about tax implications -- until you sell them. That is the point when you'll need to know your cost basis. It may be based on either the average trading price or the closing price of Palm shares on the record date.

Let's say your Palm shares will be valued at 52 on the date of record. If you hold 10 shares of 3Com, assuming the 1.5 ratio remains valid, you'd receive 15 shares of Palm. The basis in your Palm holdings, therefore, would be $780 (15 x 52).

Keep an eye on the investor relations sections of 3Com's site for more spinoff details. We'll try to keep you posted as well.

Can I Wash Out Gains Too?

Does the wash sale apply in reverse? Must I report gains in 1999 even though I re-established a "substantially identical" position within the 30-day window? I would think that the IRS must allow this or else they would be guilty of discriminating against those of us who had gains instead of losses. -- Dr. Richard Ragnell


The IRS is


discriminatory when it comes to the wash sale rule. It imposes strict limitations on capital losses, but declares all capital gains taxable. When it comes to gains, the "substantially identical" test and the 30-day window do not apply.

Nice try, though.

Send your questions and comments to, and please include your full name. Tax Forum appears daily through April 17.

TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.