NUA Distributions on Private Company ESOP stock
Does anyone have any experience doing a NUA Distribution with private company stock coming out of an ESOP? Can this be done? What custodians have you worked with who will hold private stock? If the client has a zero basis in the ESOP stock does that mean 100% of the value of the stock distributed would be subject only to Cap Gains taxes?
Permalink Submitted by BruceM on Mon, 2008-10-20 07:18
I have indirect experience with this, and this is what I understand.
Because over 90% of all ESOPs involve private company stock, they will usually not use a retail brokerage to hold and transact NUA shares. My understanding is that the NUA transactions are written to transfer the stock to a holding escrow account and then immediately sell the stock back to the employer, with the cash proceeds going through escrow to the former employee. The stock basis is reported as ordinary income to the former employee for that year. I know this is a bit sketchy, but it is the only experience I’ve had with this.
What complicates private ESOPs and NUA is that ESOPs have the right to phase plan distributions out to former employees over 5 years (longer for greater account values). This kind of distribution schedule would essentially eliminate NUA as an options, as NUA requires a lump sum distribution within the same year, not a partial distribution over many years.
Yes, in theory zero basis = 100% LTCG. But how would company stock that is added to the ESOP be considered worthless on the date it was added?
BruceM