Client has company stock in his 401k. The basis of the stock is higher than FMV. He is contemplating taking the company stock out in-kind and putting it in a taxable brokerage account.

I told him that NUA is inapplicable in his case and that the normal distribution rules would apply, so he’d be taxed at ordinary income rates on the FMV of the stock on the date of distribution.

He has other ideas. He wants to claim the COST BASIS as the taxable amount, rather than the FMV on the date of distribution.

His theory: in 2013, he has little other taxable income, so exemptions and deductions would result in little or no tax to him.

In 2014, he plans to sell stock that has appreciated and also sell the company stock, which he figures will still below cost basis. He would then be able to use the loss from the sale of the company stock to offset some or all of the gain from the sale of the other, appreciated stock.

My rejoinder was that NUA is an exception to the ordinary rule; since NUA doesn’t apply to his situation, the ordinary rule applies and FMV on date of distribution is what would be reported to the IRS by the 401k trustee.

I have to admit that his theory has some attraction in his specialized situation. Any one else come across a situation where someone actually tried this???