Net Unrealized Appreciation
My client’s company is selling 100% of it stock to private equity. The stock is 100% owned by an ESOP. My clients costs basis in his share of the ESOP’s stock is approximately $500K. His distribution from the ESOP will be about $8M. He is aware he will be taxed on the $500K cost basis. His sales proceeds from the ESOP will be deposited into a specially designated NUA brokerage account. The problem he has is the private equity buyer wants him to invest $2M into the buyer company at the closing. He does not have this kind of money available. If he takes the $2M immediately from his proceeds it is taxed as an ordinary short term capital gain. which is not good. My question is can he use the NUA account as collateral for a $2M loan or a margin loan from the brokerage house?
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-07 10:49
If the NUA shares must be liquidated upon sale of the company, seems like he would have about 8mm of cash immediately, and at least would no longer have diversification exposure. It’s not clear why a special brokerage account would be needed unless he is separating from service prior to the buyout?
When the shares are liquidated, he will owe ordinary tax on the 500k plus the LTCG rate of 20% for higher incomes on the 7.5mm of NUA.
This is a complex transaction with apparent timing ramifications. He really should request full info on the entire deal as the sale of the company will be eliminating any option of holding shares and selling them in future years to defer the realization of the LT gains.