Steve Pope wrote:
- quote -

NUA only deals with employer stock (i.e., the stock of the
employee's company) that was either purchased by employee
contributions or employer contributions. A taxpayer is only
taxed on the cost of those shares when the stock is
distributed to the employee. The NUA, (excess of FMV over
cost) will be taxed later as capital gain if the employee
meets the holding period. If a taxpayer rolls over the
stock rather than retaining it, NUA disappears and
distributions will be taxed using the normal pension/IRA
rules.

Given that we now have maximum capital gains rates that can
be considerably less than one's ordinary rate, employer
stock that has appreciated dramatically, should probably be
retained in a taxable account after distribution and tax be
paid on the cost at the time of distribution.

There are other considerations that may lead one to conclude
that a rollover makes more sense then retaining the NUA.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

- quote -

That is actually the way the employer handles it, average
cost of all shares. At least the RR applies to all
taxpayers and as far as I know, it is still in effect.

- quote -

You can roll over anything equal to the cost basis or HIGHER.

<snip> Depending upon one's future plans and market conditions, it is
- quote -

It is particularly attractive to someone under age 55 at the
time they separate from the employer. 10% (penalty) of $0 =
$0. It avoids 72(t) distributions.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Frank S. Duke, Jr. wrote:
- quote -

[ snipped by moderator ]

- quote -

Not as old as a 1957 revenue ruling. Talk about dusty.....

- quote -

I think it's a stretch also. If the taxpayer rolls over enough
shares whose market value is equal to the taxable ordinary gain
at distribution, then all the cost basis gets wiped out. The
cost basis on the shares retained would be zero. Upon sale, the
proceeds would equal the gain.

Depending upon one's future plans and market conditions, it is
possible that taking the lump sump and paying the ordinary tax
today could turn out to be a better deal than a partial rollover
that would avoid current taxation.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Steve Pope wrote:
- quote -

NUA only deals with employer stock (i.e., the stock of the
employee's company) that was either purchased by employee
contributions or employer contributions. A taxpayer is only
taxed on the cost of those shares when the stock is
distributed to the employee. The NUA, (excess of FMV over
cost) will be taxed later as capital gain if the employee
meets the holding period. If a taxpayer rolls over the
stock rather than retaining it, NUA disappears and
distributions will be taxed using the normal pension/IRA
rules.

Given that we now have maximum capital gains rates that can
be considerably less than one's ordinary rate, employer
stock that has appreciated dramatically, should probably be
retained in a taxable account after distribution and tax be
paid on the cost at the time of distribution.

There are other considerations that may lead one to conclude
that a rollover makes more sense then retaining the NUA.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

A.G. Kalman at glendale202-taxes[at]yahoo.com wrote:
- quote -

RR 57-514

- quote -

I agree that this principle applies but only with regard to
how the employer computes the overall cost basis of the
account. When distributed, RR 578-514 says, ...all shares
of the employees stock will have the same cost basis for
purposes of determining gain or loss on any subsequent
transaction..."

- quote -

To the best of my knowledge, that PLR is the only evidence
of how the IRS would rule on this situation. It is very old
and dusty but seems to be the only guidance.

- quote -

In this case, cost per share only exists to the degree that
the taxpayer has paid tax on it. If no tax was ever paid,
then I assume that the basis is $0. All the cost was rolled
over into the IRA, where one day, tax will be paid on
distribution.

I guess you could take the position that there was still a
cost of the shares that could be used to increase the basis
on sale, assuming that you would eventually pay tax on the
cost that was rolled over to the IRA. That seems a stretch
to me because tax may never be paid on that amount. Suppose
the company goes broke with the shares till in the IRA or
the taxpayer is able to withdraw the amounts tax free
because of high medical bills in old age?

- quote -

When taking a lump sum distribution, the entire distribution
of all retirement accounts to the credit to the employee
must be distributed in one tax year so 12/31 is significant
in that respect. That controls what appears on the 1099R.
The rollover decision must be made within 60 days but does
not have to be in the same tax year. Otherwise, nobody
could take a distribution after November 1st and still have
60 days to complete it. The rollover is reported on the
5498. I see this as similar to making an IRA contribution
for the previous year prior to the filing deadline.

I have been working with this for a long time and while many
people have given me opinions based on rumor and opinion,
you are one of the few to look for real answers in original
sources. I very much appreciate you expertise and you
willingness to dig in to this.

While there are few profit sharing plans where this kind of
distribution makes sense, one of the biggest is the Procter
& Gamble Company. For most employees, the basis in their
stock is about $6.80, about 12% of FMV and long term
employees typically have more than $1,000,000 worth.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Frank S. Duke, Jr. wrote:
- quote -

I can not find a cite that states the shares all have the
same average cost basis. I do find in the Regs
(1.402(a)-1(b(2)(ii)) rules for computing cost basis. There
are 4: A, B, C, D. A states if a security was earmarked for
the account of a particular employee at the time it was
purchased by or contributed to the trust so that the cost or
other basis of such security to the trust is reflected in
the account of such employee, such cost or other basis shall
be used. B states that a yearly average can be used for the
year in which there is an annual allocation to the
employee's account. C & D start to get complicated, but it
appears that D supports your position if A, B, or C are not
valid. I conclude that the shares could be from different
lots with a different cost basis if rules A, B & C fit. If
Rule D fits, then the overall average is used.

That said, you forced me to search for a ruling on point.
There is a leter ruling (8538062) that would appear to be on
point even though it deals with employee contributions. Any
how, one of the issues was how one computed the taxable
amount if one rolled over the securities. The answer was:

*********Begin Text**************
2. If a participant elects to roll over shares of Corporation N
stock received in a qualifying rollover distribution, the total
taxable amount of the distribution will be reduced by an amount
equal to the fair market value, as of the date of the
distribution of each share of Corporation N stock included in the
rollover.
*********End Text****************

This supports your position. Only $300K of FMV needs to be
rolled over to wipe out the tax bill.

This still leaves the issue of what is the NUA on the $2.5M
of FMV not rolled over (the rolled over amount was stated to
be $500K). NUA is the excess of FMV over cost. It doesn't
matter which method of cost is used, there is a defined cost
per share. In the example, assuming Rule D, the cost is $3
per share or 10% of the FMV at the time of distribution.
Therefore, the basis in the retained shares would be
$250,000 with an NUA of $2,250,000. If Rule A, B or C was
used and there was a different cost basis for some shares,
then the taxpayer would be required to document what was
retained.

This still leaves the point I made on the 60 day rule ending
by 12/31. I'm still checking on this as I do not have a
reference for any of my file notations. There must have been
some reason that I recorded a notation that the
all-in-one-year rule required completion of all events by
12/31.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Frank S. Duke, Jr. wrote:

- quote -

Before I answer, note that the approach you outline can only
work if the actual rollover takes place in the same year as
the distribution in order to meet the all-in-one year rule.
In other words, you must perform the rollover within 60 days
of distribution and no later than 12/31 of the year of
distribution.

It is my understanding that the cost basis travels with the
shares. To keep life simple, let's assume the $3M of value
is 100,000 shares [at] $30 FMV. Let's also assume that the
basis is $3 per share for a total of $300,000.

If $500,000 of stock is rolled over to the IRA, $50,000 of
cost basis (1/6 x $300K) would go with it and be lost
forever. That leaves a taxable event of $250,000 and a new
cost basis on the shares not rolled over of $250,000.

(Your post seems to have confused $500K of market value with
cost basis. 1/6th of $300,000 = $50K not 1/6th of $500K)

Where the cost basis varies by lot, the individual will need
very good records to determine the cost basis of each of the
shares. I have not seen any rules as to how one documents
which shares were rolled over and which shares remained as a
taxable distribution. I think the taxpayer should inform the
IRA custodian in writing as to the identity of the shares
rolled over and do the same to the custodian of the taxable
account where the other shares are maintained.

From a paperwork point of view, the 1099R will show, as you
point out, $300K taxable and NUA of $2.7M. The IRA custodian
will report $500K rolled over. The taxpayer is only going to
report $250K taxable. If one is using tax software, there
usually is a place to make this adjustment to the 1099-R and
generate the statement of explanation. If one is using a
paper return, then a statement of explanation will have to
go with the tax return.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Steve Pope wrote:
- quote -

NUA only deals with employer stock (i.e., the stock of the
employee's company) that was either purchased by employee
contributions or employer contributions. A taxpayer is only
taxed on the cost of those shares when the stock is
distributed to the employee. The NUA, (excess of FMV over
cost) will be taxed later as capital gain if the employee
meets the holding period. If a taxpayer rolls over the
stock rather than retaining it, NUA disappears and
distributions will be taxed using the normal pension/IRA
rules.

Given that we now have maximum capital gains rates that can
be considerably less than one's ordinary rate, employer
stock that has appreciated dramatically, should probably be
retained in a taxable account after distribution and tax be
paid on the cost at the time of distribution.

There are other considerations that may lead one to conclude
that a rollover makes more sense then retaining the NUA.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Steve Pope at spope33[at]speedymail.org wrote:
- quote -

Check out Pub 575 Pension & Annuity Income on Lump Sum
distributions of Employer Stock, page 19.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Frank S. Duke, Jr. wrote:
- quote -

I can not find a cite that states the shares all have the same
average cost basis. I do find in the Regs (1.402(a)-1(b(2)(ii))
rules for computing cost basis. There are 4: A, B, C, D. A
states if a security was earmarked for the account of a
particular employee at the time it was purchased by or
contributed to the trust so that the cost or other basis of such
security to the trust is reflected in the account of such
employee, such cost or other basis shall be used. B states that a
yearly average can be used for the year in which there is an
annual allocation to the employee's account. C & D start to get
complicated, but it appears that D supports your position if A,
B, or C are not valid. I conclude that the shares could be from
different lots with a different cost basis if rules A, B & C fit.
If Rule D fits, then the overall average is used.

That said, you forced me to search for a ruling on point. There
is a leter ruling (8538062) that would appear to be on point even
though it deals with employee contributions. Any how, one of the
issues was how one computed the taxable amount if one rolled over
the securities. The answer was:

*********Begin Text**************
2. If a participant elects to roll over shares of Corporation N
stock received in a qualifying rollover distribution, the total
taxable amount of the distribution will be reduced by an amount
equal to the fair market value, as of the date of the
distribution of each share of Corporation N stock included in the
rollover.
*********End Text****************

This supports your position. Only $300K of FMV needs to be rolled
over to wipe out the tax bill.

This still leaves the issue of what is the NUA on the $2.5M of
FMV not rolled over (the rolled over amount was stated to be
$500K). NUA is the excess of FMV over cost. It doesn't matter
which method of cost is used, there is a defined cost per share.
In the example, assuming Rule D, the cost is $3 per share or
10% of the FMV at the time of distribution. Therefore, the basis
in the retained shares would be $250,000 with an NUA of $2,250,000.
If Rule A, B or C was used and there was a different cost basis
for some shares, then the taxpayer would be required to document
what was retained.

This still leaves the point I made on the 60 day rule ending by
12/31. I'm still checking on this as I do not have a reference
for any of my file notations. There must have been some reason
that I recorded a notation that the all-in-one-year rule required
completion of all events by 12/31.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Frank S. Duke, Jr. <dukefs[at]one.net> wrote:

- quote -

So I'm curious why the entire market value is not taxed
as ordinary income. Is this only true for
stock in the employer who operates the 401(a) plan?
Or is it true for any stock coming out of a 401(a) plan?

I only ask this because I have a qualified retirement plan at
Schwab and I've always assumed that when I take distributions
from it, they will be taxed as regular income. Is there
a way around this?

Steve

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

A.G. Kalman at glendale202-taxes[at]yahoo.com wrote:

Thanks for taking the time to read this long post and thanks
for your evaluation.

- quote -

I disagree. There is certainly a requirement that the
distribution be done all in one year but I do not see any
requirement that the rollover happen in that same year as
long as it happens within 60 days of the distribution. The
IRA custodian will still issue a 5498 showing the rollover
because accounting for IRAs does not cut off until 15 April.
I would not advise a client to do this over year end
because it adds complexity to an already complex situation.

- quote -

While that might seem logical from an accounting standpoint,
I can find no REQUIREMENT in the code to consider it that
way. It seems that if $300,000 of the original distribution
is taxable and $300,000 in eligible assets from the original
distribution are rolled over, this cancels the tax.

- quote -

The code seems to be silent on this. The assets rolled over
must be from the original distribution but there is no
mention of cost basis or numbers of shares, only dollars.
The amount of the taxable distribution is reduced $1 or
every $1 of assets rolled over.

- quote -

When they are distributed, by law, they all have the same
cost basis, the average of the whole lot.

- quote -

Nor have I.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Frank S. Duke, Jr. wrote:

- quote -

Before I answer, note that the approach you outline can only work
if the actual rollover takes place in the same year as the
distribution in order to meet the all-in-one year rule. In other
words, you must perform the rollover within 60 days of
distribution and no later than 12/31 of the year of distribution.

It is my understanding that the cost basis travels with the
shares. To keep life simple, let's assume the $3M of value is
100,000 shares [at] $30 FMV. Let's also assume that the basis is $3
per share for a total of $300,000.

If $500,000 of stock is rolled over to the IRA, $50,000 of cost
basis (1/6 x $300K) would go with it and be lost forever. That
leaves a taxable event of $250,000 and a new cost basis on the
shares not rolled over of $250,000.

(Your post seems to have confused $500K of market value with cost
basis. 1/6th of $300,000 = $50K not 1/6th of $500K)

Where the cost basis varies by lot, the individual will need very
good records to determine the cost basis of each of the shares. I
have not seen any rules as to how one documents which shares were
rolled over and which shares remained as a taxable distribution.
I think the taxpayer should inform the IRA custodian in writing
as to the identity of the shares rolled over and do the same to
the custodian of the taxable account where the other shares are
maintained.

From a paperwork point of view, the 1099R will show, as you
point out, $300K taxable and NUA of $2.7M. The IRA custodian will
report $500K rolled over. The taxpayer is only going to report
$250K taxable. If one is using tax software, there usually is a
place to make this adjustment to the 1099-R and generate the
statement of explanation. If one is using a paper return, then a
statement of explanation will have to go with the tax return.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Frank S. Duke, Jr. wrote:

- quote -

Before I answer, note that the approach you outline can only work
if the actual rollover takes place in the same year as the
distribution in order to meet the all-in-one year rule. In other
words, you must perform the rollover within 60 days of
distribution and no later than 12/31 of the year of distribution.

It is my understanding that the cost basis travels with the
shares. To keep life simple, let's assume the $3M of value is
100,000 shares [at] $30 FMV. Let's also assume that the basis is $3
per share for a total of $300,000.

If $500,000 of stock is rolled over to the IRA, $50,000 of cost
basis (1/6 x $300K) would go with it and be lost forever. That
leaves a taxable event of $250,000 and a new cost basis on the
shares not rolled over of $250,000.

(Your post seems to have confused $500K of market value with cost
basis. 1/6th of $300,000 = $50K not 1/6th of $500K)

Where the cost basis varies by lot, the individual will need very
good records to determine the cost basis of each of the shares. I
have not seen any rules as to how one documents which shares were
rolled over and which shares remained as a taxable distribution.
I think the taxpayer should inform the IRA custodian in writing
as to the identity of the shares rolled over and do the same to
the custodian of the taxable account where the other shares are
maintained.

From a paperwork point of view, the 1099R will show, as you
point out, $300K taxable and NUA of $2.7M. The IRA custodian will
report $500K rolled over. The taxpayer is only going to report
$250K taxable. If one is using tax software, there usually is a
place to make this adjustment to the 1099-R and generate the
statement of explanation. If one is using a paper return, then a
statement of explanation will have to go with the tax return.

--
Alan
http://taxtopics.net

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Here is a hypothetical example of a case that many of my
clients face when they retire. I would like comments and
opinions on the approaches below:

These people are retiring from a fortune 20 company with a
large quantity of low basis employee stock in a 401(a) plan.
For example, suppose they have $3,000,000 in employer stock
with a company cost basis of $300,000.

1. IRA Rollover by direct transfer - No question about this
one. Do a direct rollover to an IRA with no immediate tax
consequences. At the end of the year, receive a 1099R with
$3,000,000 in the Gross distribution box, $0 in the Taxable
Amount box and a transaction code of G. Many have done this
in the past to allow them to immediately sell the employer
stock to diversify.

2. IRA Rollover by lump sum distribution - No question about
this one. Take a 100% distribution of the employer stock
into a taxable account and within 60 days roll it all over
to an IRA. Since it is employer stock, there is no required
withholding on distribution. Custodian of the retirement
account issues a 1099R showing a gross distribution of
$3,000,000 and a taxable amount of $300,000 and $2,700,000
in the NUA box 6. The distribution code is 1, 2, or 7
depending on the individual's circumstances and age. The
custodian of the IRA issues a 5498 showing a rollover of
$3,000,000. No immediate tax is due and the effect is the
same as option 1, with more paperwork.

3. Lump sum distribution, no rollover - Same as option 2 but
the retiree does not do any kind of IRA rollover. At the
end of the year, he or she will owe tax on the $300,000 cost
basis as ordinary income. The retirement account custodian
issues a 1099R showing $3,000,000 distributed and $300,000
taxable with $2,700,000 in the NUA box. Later, when the
stock is sold, it has basis equal to $300,000 divided by the
number of shares originally distributed. All the NUA is
long term capital gain immediately and after 1 year, even
appreciation above the distribution price is long term
capital gain.

I think you will all agree that the above are well
established distribution methods.

4. Lump sum distribution, partial rollover - Same as option
2 except the IRA rollover is equal to $500,000 worth of the
shares that were originally distributed. Custodian of the
retirement account issues a 1099R showing a gross
distribution of $3,000,000 and a taxable amount of $300,000
and $2,700,000 in the NUA box 6. The distribution code is
1, 2, or 7 depending on the individual's circumstances and
age. The custodian of the IRA issues a 5498 showing a
rollover of $500,000.

If you enter this transaction exactly as I have stated in
any tax software you chose, you will typically code the
details of the 1099R and at the bottom, you will have a
place to enter a partial rollover. If you put in $500,000,
which is what it really was, some software will tell you
there is an error because the rollover cannot exceed the
taxable amount. Other software will ignore this discrepancy
but all will zero the taxable amount on the front of the
form 1040. In that case, there is no current tax due and
the basis of the $2,500,000 in stock outside the IRA is
ZERO.

Many say this approach is controversial, that the basis
should be allocated between the stock rolled over and the
stock remaining outside the IRA. In other words, the amount
of the rollover on the return should only be 1/6 of the
$500,000 basis or $83,333 but in fact, the custodian of the
IRA actually reported $500,000.

Has anyone actually used method #4? Does anyone know of any
case where it has been challenged? Was the challenge
successful and if so, can you provide a citation? Does
anyone know of any original source that specifically speaks
to this situation and either supports or denies it. I have
been unable to find anything that requires the allocation of
the basis between the stock rolled over and the stock
remaining outside the IRA. As long as the IRA custodian
reports a rollover greater than or equal to the cost basis
reported on the 1099R and the rollover occurred within 60
days of distribution, the taxable amount is zero.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >