NUA/Frank Duke Method
Does anyone know of an IRA custodian that will issue a 1099B as described below?
Under the hypothetical scenario under discussion, how would it be reported to the tax authorities
and
properly documented? Presumably a 1099R would be issued by the 401-k Plan covering the LSD directly
to the distributee. The 1099R would show a gross distribution of USD 3.5 million (line 1) and a
taxable amount of USD 1.1 million (line 2a). On the 1040 Tax Form, line 15a would show the gross
distribution. The words “Rollover/NUA?” would be entered next to line 15b. And zero would be
entered in line 15b (i.e., zero gross income included in current year tax calculation). Perhaps an
explanation statement would need to be included to show that the taxable amount in kind was rolled
over to an IRA and the balance was retained as NUA. Would this make sense? The total employee
shares distributed as LSD by the 401-k Plan would be deposited in a separate after-tax account set
up for this purpose. The indirect rollover of shares equivalent to the taxable amount (or more
depending on the taxpayer’s individual plans for tax and estate management) would be transferred
within 60 days from this after-tax account. The rollover would be documented for tax purposes when
the new IRA custodian issues the corresponding 5498. The shares remaining in the after-tax account
would constitute the NUA shares with cost basis of zero, such that the gross proceeds from any
future stock sale would be taxed at the capital gains rate. Different rules would apply if these
NUA shares are inherited after taxpayer death. Might the foregoing approach work? Thanks for the
discussion of this strategy.
Re:
Permalink Submitted by Alan - IRA critic on Tue, 2017-01-03 20:35
The 1099R showing an NUA and taxable cost basis amount will be issued in the case of a qualified LSD. The tax code clearly allows NUA shares to be rolled over to an IRA within 60 days of distribution, allowing the taxpayer to change their mind about NUA and then just report an indirect rollover to an IRA. However, the Regs are silent regarding whether the cost basis per share and NUA per share can be aggregated into different shares, which is what the Frank Duke proposal is all about. I am not aware of anything new in the way of IRS guidance, but this thread contains a lengthly discussion of the Duke proposal. I recall the observation being made that if a few of these have made it through the IRS, it may well have been because the IRS had no idea on what they were looking at as opposed to approval of this method. Therefore, if a taxpayer reports such a partial rollover on line 16 of Form 1040 with 0 taxable income on line 16b because they aggregated the total cost basis to the rolled amount, there is no way to predict if it would produce an IRS inquiry or not. Here is the prior thread on this subject: https://irahelp.com/forum-post/17504-nua-lsd-401k