Unwinding NUA distribution

Submitted by Chip Simon on Tue, 2016-08-30 16:52

Surviving spouse had 300K company stock in decedent’s 401k.
401K administrator told her that basis in company stock was <$10,000.
NUA distribution was taken in March, then 401K administrator was changed.

New 401K administrator then reported the NUA distribution at >$100,000.
Client queried and as of last week, the new administrator completed their
research and stands by their recordkeeping. So we have $100k ordinary income
to deal with.

Question – is there any precedent for putting the genie back in the bottle
to reverse the NUA distribution during the same calendar year?

Thanks.

Chip Simon, CFP
Poughkeepsie, NY



Submitted by Alan - IRA critic on Wed, 2016-08-31 00:57

  • Chip, since the 60 days has passed, this would have required a PLR request – until less than a week ago when the IRS released a Rev Procedure   https://www.irs.gov/pub/irs-drop/rp-16-47.pdf that allows the taxpayer to complete a later rollover through a certification process subject to specific reasons causing the late rollover.
  • Note that reason 2 includes an error made by the distributing plan. If the client can prove that the NUA cost basis was severely understated before the distribution and was corrected after the distribution, it appears client could complete the certification letter and use it to convince an IRA custodian to accept the rollover contribution of the NUA shares. There are various time limits, but client needs some documentation of what happened because the IRS can always ask for more information and if they do not think the situation meets the intent of the restricted reasons, they could rescind the rollover down the road. This will avoid the time and expense of a PLR for many taxpayers. If the client does not have written evidence of the original NUA and the later date revision, this might be a problem.
  • I don’t see that the IRS release excludes distributions made prior to the 8/24 date of the release.

  

Submitted by David Mertz on Wed, 2016-08-31 15:18

  • Just be aware that self-certification is not itself a waiver of the 60-day rule.  It simply allows the IRA custodian to accept the rollover.  Should the IRS later question the rollover and make a determination, the IRS could provide an unfavorable ruling, resulting in a failed rollover.
  • Under somewhat similar circumstances, the IRS did decline waivers of the 60-day rule in PLRs 200617039 and 200634017 through 200634022 on the grounds that, while the plan originally provided incorrect information as to the eligibility of the distribution for NUA treatment, there was no error in the actual distribution and there was no original intent by the payee to roll the distribution over, stating,  “We do not believe that Congress intended to permit the Service to retroactively correct tax treatment choices which do not produce the expected benefits even though, in this case, these choices were the result of erroneous advice provided to Taxpayer A by Individual C… .”
  • Self-certification and rollover must be performed “as soon as practicable after the reason or reasons listed … no longer prevent the taxpayer from making the contribution.”  In this case, nothing prevented the payee from performing a rollover.  In Rev Proc 2016-47 3.02(a), it’s possible that the IRS is referring to errors made by the financial institution that result in the payee not knowing that a distribution or rollover had been improperly made.

Add new comment

Log in or register to post comments