Pondering NUA Wipe-Out Alternatives

Submitted by BARTON MASSEY on Sat, 2016-04-09 21:16

No Ulterior Motive here–just wondering where my reasoning almost certainly has gone astray in considering my NUA disposal options.! Form 1099-R issued for my LSD NUA in 2000 has all appropriate boxes filled in–gross distr./taxable amt./distr.normal&total/and in box 6 the $ NUA. But nowhere do I find no. of shares or tax basis per share. Employer’s LSD papers sent to me provide all necessary share info, so can calculate–and adjust for subsequent stock splits–the per-share basis and NUA components. I can well understand the IRS’s attention on securing LTCG tax on full NUA. But I wonder if tax people somehow know original LSD per-share nos. (acquisition cost & NUA amt.). Subsequent share splits add another complication to maintaining correct records. And with estate plans, it may be decades before the NUA considerations are eliminated. Can the per share info noted above be back-calculated somehow from 1099-R? Did employer send supplemental info to IRS to be matched with this LSD? Does broker have obligation for reporting tax basis on current transactions relating to share issuance in 2000? Does broker have need to know re all NUA details? (Broker holding our shares doesn’t have tax basis or NUA info on our deposit in 2000.) Point here is: Could sale results of NUA shares be modified reasonably by taxpayer to accelerate write-off of full NUA amt.? Say: Total NUA=$210k; NUA per share=$60 (3,500shs); tax basis per share=$20; FMV=$80. Case 1- FMV, now 100, less 20 basis & 60 NUA component = 20 appreciation. Case 2 (modified reporting results) FMV 100 less 20 basis & 80 NUA component = -0- gain. In both cases, IRS’ tax take is even (assumes LTCG on NUA pc.& any appreciation). But in Case 2, IRS obtains full tax recovery on total NUA amt. at a faster rate, with more simple record keeping by shareholder and without forced complete disposal of original total 3,500 NUA shares. Surely this is not an unstudied matter! But my research has not found any clear discussion. Appreciate very much any comments.



Submitted by Alan - IRA critic on Sun, 2016-04-10 01:01

  • There should be other correspondence providing the details of your distribution of employer shares. If you do not have that, then you must first determine if there was any other assets included on the 1099R besides employer shares. Once you are sure the 1099R is reporting the value of employer shares only, then check if anything shows up in Box 5. If nothing, you know that the shares were purchased with only pre tax dollars. You need to know the number of shares distributed and divide that number into Box 2a to determine the cost basis per share you were taxed on. Then divide the number of shares into the NUA figure in Box 6 to get the NUA per share at the time of distribution. That is where you start. Then you must adjust these figures by stock splits to get the adjusted NUA and cost basis per share. Try to get the broker to accept these figures and enter it into their reporting system so they can issue a correct 1099B when you sell shares. If they do not, then you will have to make the adjustment on Forms 8949 to override any errors on the broker’s 1099B.
  • For case 1 when you report the sale, you can combine the NUA with the non NUA LT gain, and report the total gain as a LT gain on Form 8949 of 80.
  • Case 2 – Here you have a LT gain of 80 same as above but due to higher NUA but no additional gain.
  • Re reporting guidance – I have not seen anything either so you have to improvize to get the correct result. I would keep detailed notes but not try to explain them to the IRS unless you get an inquiry.
  • The most complex situation is when you sell in the first year with an additional gain that is ST. You would then have different sections of the 8949 for ST and LT gains, but would have to show a higher cost basis for the ST gain to get an accurate result.
  • You might also have a loss of NUA. In that case you just have less NUA (less LT gain ) when you sell. For shares you keep the regain lost value, the NUA is reinstated but cannot go higher than the split adjusted NUA per share at the time of distribution.
  • This is messy enough. Hope you are not reinvesting dividends after distribution.
  • Not sure if this helps. Would be nice if the IRS provided specific guidance in one of the Pubs such as 550.


Submitted by BARTON MASSEY on Sun, 2016-04-10 23:47

Alan,  Thanks very much for response with welcome detail!   Your discussion will serve as a very helpful checklist.  As you expertly posited re a messy situation likely made worse if LSD share dividends were to be reinvested, that is exacly the case here, where from first distribution in 2000 through today, all dividends have been fully reinvested, including split shares — and no original/split/ or dividend shares have been sold or otherwise removed from the original brokerage account. The broker has asked us for total and per-share cost basis numbers for the LSD deposited shares, but I’ve not responded due to uncertainty re our own best interests.  I’m loath to stretch Forum rules for topic length, but I’d like to clarify a point that may have been unclear in my original post, and also ask a question on a point you mentioned that’s very real in my case–loss of NUA.1.  Case 2 was meant to highlight an alternative treatment of Case 1 with respect to NUA writeoff, not pose a different set of sale details. Both Cases have same per share FMV ($100) and tax basis ($20), but Case 1 uses the correct NUA per share amt. ($60) so generates a taxable profit ($20), while the seller in Case 2 opts  to supplement the NUA amt. ($60) by also designating the full taxable profit ($20) as NUA writeoff  In each case, the IRS collects full LTCG tax on $80, but in Case 2, the wipe-out of total NUA is progressed faster (by$80 vs. $60).  Moreover, Case 2 avoids forced sale of the full original NUA share quantity while not affecting the IRS’ total tax take on that sale.  Seems like I’d be indifferent from a LTCG tax standpoint on whether my per share sale proceeds were designated “basis(20)+NUA(60)+appreciation(20)” vs. “basis(20)+NUA(80).”  But the latter choice would seem to provide a simpler and faster way to wipe out the total NUA amt.,especially if all LSD-related shares–original/split/dividend reinvestment–could be applied for NUA purposes.  Perhaps I’m overlooking the effects of  no step-up at death on NUA shares and the associated IRD treatment– the complexity continues to accumulate!2.  A very real possibility in our case is that a sale of NUA shares, after deducting basis, would not provide enough balance to cover the split-adjusted original per-share NUA value.  You described this possibly, but I’d like to recheck the wording of the third sentence-first clause: “For shares you keep the regain lost value,” the NUA is reinstated. . . .”   Sample case: FMV 30, basis 8, NUA per share 24, loss 2 –would write off NUA 22 and allocate the 2 NUA shortfall over remaining NUA shares. Current L-T tax loss of 2.Thanks again for your thoughful much-appreciated help.  Bart Massey      



Submitted by BARTON MASSEY on Mon, 2016-04-11 01:50

Alan:  I have no idea why my careful effort to format last msg. in a most readable form (para., nos., spacing, etc.), totally failed.  It looked o.k. as finally prepared before sending, yet version shown in forum looks like a mess! Sorry!B 



Submitted by Alan - IRA critic on Mon, 2016-04-11 19:08

  • Bart, I may be missing your point, but it appears to include the debate regarding NUA amounts be used as a floating amount vs. a strict amount PER SHARE of stock. This link includes a long discussion regarding an approach taken back in the 80s that the IRS approved in PLR 85 380 62 but have since sent out mixed signals. https://irahelp.com/forum-post/17504-nua-lsd-401k
  • Your Case 2 “NUA writeoff” appears to utilize this aggressive concept of aggregate NUA amounts, albeit in a different way than the PLR used it. There is considerable doubt that the IRS would approve such an approach today.  The more traditional and safer approach is to lock the NUA and cost basis to an amount per share for each individual share of stock that was distributed or split after distribution. As such an additional amount of NUA could not be applied instead of additional cap gains after the distribution date. You make a good point in that it would reduce NUA with respect to inherited IRD. So even though the current taxes would be the same upon sale with the same amount of LT gain, the future accounting is altered for other shares and total remaining NUA.
  • Until you get a chance to read the link above, in a nutshell that old PLR involved a distribution of lets say 100k of employer shares with 20% cost basis and 80% NUA. The taxpayer uses a code section that states that when an amount distributed from a QRP is rolled over the taxable amount is rolled over first. Taxpayer then rolls 20% of the shares over to an IRA, reports no taxes on the LSD since the cost basis is rolled over and is left with 80% of the shares characterized as all NUA. All current taxes are avoided, although the total amount of NUA stays the same. When shares are sold, there is 0 cost basis, and all NUA or additional gain. Different goal from what i think you are asking, but also depends on aggregate dollar values, not per share values.
  • For the situation at the end of your post, the per share method for a sale below the value at distribution of 2 would result in a permanent loss of NUA of that 2 rather than sliding that unused 2 to other shares or claiming a LT loss of 2. However, if the shares were not sold and the stock regained the loss of 2 back up to 32, then the full amount of NUA would again apply to those shares. NUA per share would be capped at 32, but as the shares trade lower than 32, the amount of NUA on any particular day would fluctuate.
  • In summary, any method that does not lock the NUA or cost basis to each share permanently is aggressive and some of these aggressive approaches skate through, but we do not know if the IRS even knew what they were looking at. Hope this helps.


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