Tricky Tax Treatment For Orchard Supply Preferred Shares

We’ve written before about the puzzle of Orchard Supply Hardware Preferred(OSHSP). This preferred issue was spun off from Sears Holdings(SHLD) together with Orchard Supply Common(OSH).  While we’re still not sure how to value them, thanks to Laurie Frederiksen, COO of bivio.com for pointing out some tricky tax treatment for their distribution.

It seems that unlike most spinoffs which are tax-free- Rouse(RSE) is another recent exception – the preferred shares are subject to “Section 306” and are treated as dividends. The fair market value of the preferred stock on the day of distribution(with some latitude here as the stock moved quite a bit) is treated as dividend income and adjusts cost basis on the preferred downward. Subsequent sales can be subject to an additional capital gain, though no losses may be taken. Investors are likely to have had some of this stock sold and received cash in lieu of fractional shares- this will trigger complex tax issues for an insignificant amount of money. Unfortunately, the IRS considers all income to be material, resulting in high overhead for small investors struggling to figure this all out.

Disclosure: Author owns OSH, SHLD and OSHSP

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