Cost Basis - Stock - Unitized Fund

[CO Bank]

An investment option in our K plan is company stock. Our plan allows in-kind distributions of the stock. The question we've been kicking around is how to determine the cost basis. I've received conflicting info from two large mutual fund companies and our outside attorney. I'd like to throw this out there and see if anyone else can shed light on this for us.

Since April 2002 the stock has been held in a unitized fund. Participants do not own shares directly, rather they own units of the fund. These units have a mathematical relationship to the number of shares owned.

The IRS in a private letter ruling states that

“….if a security was earmarked for the account of a particular employee at the time it was purchased or contributed to the trust so that the cost or other basis of such security to the trust is reflected in the account of such employee, such cost or other basis shall be used.”

I can send anyone who is interested the PLR mentioned above. One of the issues here is what does 'earmarked' mean? Does it mean that the participants need to own the shares directly? Or does it mean they can own units of a unitized fund, whose units translate into actual shares?

This is an important question for us. Our 401k administrator holds the stock in a unitized fund. If we cannot use the actual cost basis described above, we need to average out the cost basis for the fund as a whole - which results in a very different number.

I know many participants take in-kind distributions - would be interested to see how others determine the cost basis.