NUA Basis

Submitted by Ryan Dignum on Wed, 2015-06-10 19:13

Facts:
I have company stock in my employer plan worth $2,000,000 with a cost basis (per plan administrator) of $900,000.
Questions:
If I elect to take NUA I will pay ordinary income on the cost basis ($900K) in the year of the election and long term capital gains on the sale of the stock in the future. Correct? How is the $900K taxed after I have paid ordinary income on the distribution? For example: I paid ordinary income tax on the $900K could I sell the position the very next day and pay no capital gains tax since my basis was $900K or is it aggregated across the total $2,000,000? If it is aggregated would it make a difference if the $900K went to non-qualified account #1 and the $1.1 million would go to non-qualified account #2?

Thanks for your help.
Ryan



Submitted by Alan - IRA critic on Wed, 2015-06-10 21:27

  • Yes, the cost basis of 900k is taxable as ordinary income in the year of the LSD. The general consensus is that each employer share has a cost of basis per share, therefore if the shares are worth 100 each upon distribution, your taxable cost basis will be 45 per share. The LT cap gain from NUA is 55 per share, and each share you sell will generate LT cap gains of 55 if you sell when the shares are still worth 100.
  • While the IRS has not issued clear guidance, some tax accountants feel that someone using your example could roll 900k worth of shares into an IRA within 60 days using an aggregate basis approach instead of a per share approach. That would eliminate the tax bill on the 900k and the remaining shares would have a 0 cost basis which means that upon sale of the remaining shares the entire income would be LT cap gain. This is the minority view and persuing it involves a considerable amount of risk. Again, this approach includes an IRA rollover so there would only be one taxable account, not two. This approach is rooted in old PLR 85 380 62.
  • If you do not need to raise money for current expenses, a 45% cost basis amount is too high for a net benefit from using NUA because you not only lose tax deferral on the 900k, but it is all lumped into a single tax year which would spike your marginal rate. You do not have to use all these shares for NUA. You could sell 2/3 of them in your plan and use only the remaining 1/3 for NUA. That would lower the cost basis to 300k and also reduce the NUA to 370k.

Submitted by Bruce Steiner on Sun, 2015-06-14 16:43

PLR 8538062 says you can roll over shares having a value equal to the toal cost of the shares. PLR 201144040 assumed you can do this. The taxpayer in PLR 201144040 did not ask for a ruling on this issue, since he assumed that he could do this. He was not not aware of PLR 8538062. On the other hand, PLR 8426132 assumed you couldn’t do this. There’s no way any of us can be sure whether you can or cannot do this. Read the rulings and whatever else you think appropriate, and draw your own conclusion. Consider applying for your own ruling. Now that anyone can convert to a Roth regardless of income, consider whether the rollover followed by a Roth conversion (either all at once or over a number of years) is preferable to NUA.

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