Understanding Cost Basis
You must determine your "cost basis" (also called "tax basis") to calculate your net gain or loss when you sell stock. This cost basis is then compared to the sale price of the stock to determine your net gain or loss. If you bought your shares (and did not acquire them as a gift), "cost basis" refers to your cost of acquiring your shares of stock. If you received your shares as a gift, please consult your tax advisor to determine your cost basis.
Because of Avaya's spin-off from Lucent, you must divide — or allocate — the tax basis of your pre-spin-off Lucent shares between your post-spin-off Lucent shares and the Avaya shares you received on September 30, 2000. The tax worksheet will help you calculate your cost basis.
Based on the average high and low prices at which Lucent and Avaya traded on October 2, 2000 - as reported for the New York Stock Exchange transaction - 94.524% of your pre-spin-off tax basis should be allocated to your Lucent shares, and the remaining 5.476% should be allocated to your new Avaya shares (including any fractional share interest).
Lucent received a ruling from the Internal Revenue Service that the distribution of Avaya common stock qualifies as a tax-free distribution for federal income tax purposes in the United States. This means that, in general, Lucent shareowners will not recognize a gain or loss related to the receipt of Avaya shares, except in connection with cash received in lieu of a fractional share. The taxable gain or loss that must be recognized for income tax purposes will be equal to the difference between the cash received and the shareowner's tax basis in the fractional share. Use the tax worksheet to determine your tax basis.
More on the Lucent Spin-off
Lucent Technologies Inc. distributed its shares of Avaya Inc. common stock to Lucent shareowners on September 30, 2000, as expected. Lucent and Avaya are two fully independent, publicly owned companies.
Lucent shareowners of record on September 20, 2000, received a distribution of 1 share of common stock of Avaya for every 12 shares of Lucent stock owned. The distribution was made on September 30, 2000. Fractional shares of Avaya's common stock were not distributed. Fractional shares held by holders of record were aggregated and sold in the public market by the Bank of New York. The aggregate net proceeds of these sales were distributed ratably to those shareholders who would otherwise have received fractional shares.