Net Unrealized Appreciation

[Guest Kbro]

Retiree did an NUA with his ESOP shares in February and transferred all shares in his ESOP to a taxable account. Followed the rules to the letter and got the correct paperwork from Fidelity. The triggering event was his termination from service in April of 2009 and the transfer was accomplished within one year. He is 62.

Last month he received a dividend check from his ESOP and to his surprise found out that his employer had funded it for another 50 shares in March of this year.

His concern now is that through no fault of his own, that instead of just the cost basis being taxable in 2010, now the whole ESOP distribution is taxable in 2010. The difference between the cost basis and mkt value at transfer was about $30K.

Any ideas?

[GMK]

My understanding of NUA (which others here can correct or confirm) is that NUA treatment is available if the distribution was a lump sum distribution (which can include multiple distributions within the same tax year) that was the first distribution following an NUA triggering event, like retirement, death, etc.

If the distribution was completed in 2009, then it sounds like the NUA is OK. NUA treatment is not available for a distribution of the additional 50 shares in 2010, unless there was another triggering event after the 2009 distribution.

If the first distribution was completed in 2010, then it seems likely that the 50 shares added in 2010 would have to be distributed in 2010 to make it a lump sum distribution within the tax year 2010, and the basis of the 50 shares would be taxable as regular income. (There could be a little NUA in the 50 shares, for example, if some were from forfeitures.)

It might help to look at the form 4972 and its instructions:

http://www.irs.gov/pub/irs-pdf/f4972.pdf

And here's some reading that may or may not help:

http://benefitslink.com/links/20021029-019131.html

http://benefitslink.com/boards/index.php?showtopic=27490

http://benefitslink.com/boards/index.php?showtopic=17532

http://benefitslink.com/boards/index.php?showtopic=13276

In many cases, you will see the wise suggestion to contact a tax lawyer about this topic.