Reversal of Distribution
Taxpayer took a distribution of stock in 2008 from a defined contribution plan and paid the tax on the value. He still holds the stock but it has declined about 50% in value and if sold would generate a large capital loss. Can the taxpayer reverse the distribution in 2008?
Permalink Submitted by Alan Spross on Thu, 2010-06-03 19:40
No, the 2008 distribution cannot be reversed. He had only 60 days from the date of the share distribution to change his mind and roll those shares over to an IRA.
I can’t tell from your post whether the 2008 distribution was done to take advantage of NUA in appreciated company shares, or whether this was a distribution of other shares held in the plan. With NUA he would have been taxed only on the average cost basis of the shares when the plan purchased them, rather than on the value at the time of distribution. For NUA, the basis of the shares is the cost basis that was taxed in 2008, but for other shares his basis is the value per share at distribution, and that figure would be higher than the basis for NUA shares.
Either way, if the shares have dropped enough since 2008, he would have a LT cap loss upon sale of the shares. On the other hand, if he holds the shares and the shares recover, there is no tax up to the basis amount, and additional gains would be taxed at the LT cap gain rate. There are additional adjustments to be made if after tax contributions to the plan were allocated to these shares,
In most situations like this, the decision to sell should be based primarily on the future prospects of the stock as well as the need to be properly diversified.