NUA separate tax lots
Hi,
Example of circumstances:
1) Employee has employer stock in a plan where they keep tabs on separate cost basis lots and report it that way on 1099R based on what lots the client distributes.
2) Client distributes employer stock using NUA. Let’s say the client distributes 1000 shares from a $5 lot and 1000 shares from a $10 lot. Total basis of shares distributed = $15,000 and the company issues the 1099R showing it at $15000 basis for the 2000 shares. Client rolls over higher basis shares.
Question: Does the different basis of the different lots survive the distribution from the qualified plan? Or is it averaged and the client has 2000 shares with a basis of $7.50?
Thanks!
Permalink Submitted by Alan Spross on Tue, 2010-12-07 22:39
I am not aware of any specific authority addressing flexibility in assigning basis, but the prevailing opinion seems to be that the average cost must be used once shares are reported on the 1099R, ie the total cost basis reported divided by the number of shares distributed.
In other words, the pre distribution rollover of various lots separated by price is OK and some plans will agree to complete the 1099R based on selection of lower cost basis shares while higher cost basis shares are rolled over to an IRA. This is effective in selecting NUA shares will the lowest cost basis. But once the distribution is made, the various shares likely cannot be sold by specific share selection even though the taxpayer may have documentation that they received two lots of shares with different costs. This makes sense since the NUA shares are purchased using unlimited price points, so a taxpayer could theoretically have hundreds of different cost per share figures if this was carried to an extreme.
Further, it would also not work if the employee received all the NUA shares and tried to roll the highest cost shares in an indirect rollover, retaining the lowest cost shares for NUA. In summary, the client most likely has 2000 shares, each with an average cost basis of 7.50, whether they retain all the shares as NUA or attempt to roll only the $10 shares to an IRA.
Under the new basis reporting regulations going into play in the next couple of years, an aggresive taxpayer might try to get the documentation from the plan for the cost basis of various lots, provide that documentation to the broker holding the NUA shares, and try to get them to recognize receipt of x shares @ $5 and y shares @ $10. Then when the client sells shares ask the broker to recognize specific shares @ $5 as the shares being sold. That would be reflected on the 1099B in couple years and the IRS would likely not question the 1099B information. I am not recommending this, but an aggressive taxpayer would probably have a better chance of success when the broker indicates the cost basis.
Permalink Submitted by David Briegs on Tue, 2010-12-07 23:12
Thanks! This is what I suspected but was not sure and wanted to be certain.