Taxation of stock distribuiton by ESOP repurchased over 5 year period

[Guest moosegirl]

Company stock was distriubted to a terminated participant by the ESOP in 2004. The ESOP is repurchasing the stock from the participant over a 3 year period, with interest. Is the total distribution taxable to the participant in 2004 or taxable over the 3 year period as installment payments are received?

[mbozek]

The employee is taxed as ordinary income on the amount of the basis (i.e., employer's cost) in the year the shares are distributed to the employee (2004). Under IRC 402(e) the net unrealized appreciation (NUA) which is the fmv of the shares in excess of the basis is not taxed at distribution. The NUA is taxed as capital gains the year the shares are sold by the employee (CG = sales price - the basis). All NUA on the date of distribution is taxed as Long term CG. It is presumed that the stock was distributed as part of a lump sum distribution in 2004. There is a different rule for taxation of er stock which is attributable to ee after tax contributions. The employee needs to consult a tax advisor to determine the taxation of the distribution.

[Guest moosegirl]

Mbozek--thank you for the information.