An article in last Sunday's Business section gave an incorrect formula for determining how owners of "old," predivestiture shares of American Telephone & Telegraph Co. could figure the cost of their new telephone company shares for tax purposes this year. A shareholder should start with the original cost of the old AT&T shares and divide that by the number of shares owned. That gives the cost per share of old AT&T. Then, that number is multiplied by the following factors to give the cost basis per share for the new AT&T and each of the seven operating companies split off from AT&T: New AT&T 0.286743/Ameritech 0.103988/Bell Atlantic 0.105539/Bell South 0.136165/Nynex 0.99034/Pacific Telesis 0.83073/Southwestern Bell 0.95481/U S West 0.89976 As a final step, multiply the result for each of the seven operating companies (but not the new AT&T) by 10 to get the cost basis per share (a stockholder gets 10 shares of each regional operating company for each 100 shares of old AT&T). Thus, if the cost of old AT&T was $60 a share, the cost basis of new AT&T would be $60 times 0.286743, or $17.20. The cost basis of Ameritech would be $60 times 0.103988, or $6.24, multiplied by 10, or $62.40 a share.

Early last year, American Telephone & Telegraph Corp. shareholders became the proud owners of the stock in the seven new regional operating companies, or ROCs, spun off from AT&T.

AT&T maintained that the entire distribution of new shares was a tax-free exchange with no immediate income tax consequences. But the Internal Revenue Service decided otherwise, and that has obliged those AT&T shareholders to do some complicated additional figuring on their 1984 federal tax returns. An attempt to explain it all follows.

According to the IRS, 39 cents a share of original AT&T distribution was a dividend (chargeable to Pacific Telesis, one of the seven ROCs) to be reported for 1984; this, in turn, slightly changed the formulas that taxpayers must use to calculate the cost basis of the shares they received from the divestiture.

Early this year, the IRS issued Notice 725 informing shareholders that, despite AT&T's contention, they must report that 39 cents per old share as dividend income. Notice 725 contains a warning that failure to report this additional dividend could lead to a penalty for underreporting.

The amount of dividend that the IRS shows on that notice -- based on the number of AT&T shares a taxpayer owned on the divestiture date -- should be reported separately on Schedule A, along with other dividends, including the dividends from the "old" AT&T as listed on Form 1099-DIV by American Transtech (a service company that handled some shareholder paperwork for AT&T).

Accounting for that 39 cents a share as a dividend changes the allocation percentages for determining the cost basis for all the new shares. Start with the original cost of the old AT&T shares; divide that amount by the number of shares owned (100 in this example), and then multiply by the following percentages to that per-share cost to arrive at the cost basis for each of the new shares.

AT&T post-divestiture/28.6743%

Amer Info Tech/10.3988

Bell Atlantic/10.5539

BellSouth/13.6165

Nynex/9.9034

Pacific Telesis/8.3073

Southwestern Bell/9.5481

U S West/8.9976

The distribution amounted to 10 shares of each of the new ROCs for each 100 shares of old AT&T owned, so an additional step is required. You now must multiply the amount derived from the percentage calculation for each new company by the number of shares of that company you now own. In our example, starting with 100 old shares, you would multiply the per-share basis of the new AT&T by 100, and the basis of each of the other regional companies by 10.

That 39 cents adds another complication. Because it was not distributed in cash, but instead was added to the untaxed portion of the divestiture distribution, you must add the amount of that dividend to the cost basis of your Pacific Telesis shares, as determined by the percentage calculation.

If you kept all of the shares distributed as a part of the divestiture, then all you need to do is keep a note of all of these cost figures with your investment records. They will provide you with the cost basis to be used if you should sell any of these shares some time in the future.

But many of you decided to keep only the shares of selected post-divestiture companies, and to "swap" the shares of the companies you didn't want for the ones you wanted. What I suspect most of you didn't understand was that this exchange was not a part of the mostly tax-free divestiture, but rather a set of distinct "buy" and "sell" transactions, each of which created a taxable event.

You should have received two pieces of paper from American Transtech relating to this share-swapping. Early last March, you should have received a transaction statement showing the shares that were disposed of, the price per share (minus the 25-cents-per-share exchange fee), the total amount received for each company and then the number of shares of the company you selected that were purchased with the sale proceeds.

Then early this year, American Transtech should have sent you a Form 1099-B repeating the information about the sales, but with no indication of what you did with the proceeds. (From a tax point of view, it doesn't matter whether you took the cash or used the money to purchase additional shares of one or more of the ROCs.)

Each of the sales must be reported on Schedule D of your 1984 tax return -- in Part I (short-term) if you had owned the old AT&T shares for a year or less, in Part II if your holding period was greater than a year and the transaction thus resulted in a long-term gain or loss.

Remember that the date of acquisition for determining whether the transaction is short or long term is the date you originally bought the old AT&T shares. The cost basis for any ROC shares you sold -- either in the normal manner or as a part of the exchange procedure -- is the cost figure you arrived at by the percentage calculations explained earlier.

The cost basis for shares you bought as a part of the swap also was shown on the transaction summary you received last year. The figure consisted of the total proceeds received from the sale of the shares you didn't want minus any cash returned to you because it wasn't enough to buy another full share. (That cash refund is not reportable on your tax return; it already is included in the sale figures.)

But this cost basis for shares purchased is not the total cost of all of your new shares. To get that number, you would have to add the dollar amount arrived at from the percentage calculations that determined the cost basis of the shares you originally received on the divestiture -- because you now own both the divestiture shares and the new shares you bought with the proceeds from selling the shares you didn't want to keep.

If you still have a problem, ask for help at your local IRS office or visit a competent tax preparer.