NUA In Leveraged ESOP

[Disco Stu]

I am trying to decide how to apply the net unrealized appreciation rules in the case of a leveraged ESOP.

My facts are as follows...

The company got a $1,000,000 loan to buy 500 shares from an owner. The loan is paid in 10 annual installments (variable interest rate). Based on the chosen share release method, 50 shares will be released each year.

The possibilities that I am considering are that the basis of the shares is...

1. $1,000,000 always

2. The cumulation of the contributions made to the plan to repay the loan (principal + interest)

3. The fair market value of the shares on the dates that they are released.

I'm inclined to think the #1 is correct, but I wasn't sure from reading the regs if any of the examples specifically applied to a leveraged ESOP.

In addition, there is cash contributed to the plan. When employees terminate employment they are not given the opportunity to take shares from the plan. Their shares are purchased with the cash in the plan and the shares are redistributed to the remaining employees. I am also inclined to think that these shares would retain their original cost basis because they have not left the trust. But again I haven't found concrete information to support this.

Any cites and input would be appreciated.

p.s. I do realize that since the plan does not allow a distribution in shares that NUA doesn't apply. I just prefer to track the basis in case the employer changes their mind about the distribution policy in the plan.

[RLL]

You are correct! The basis of the shares for NUA purposes is the cost (#1 in your post). Even when reallocated (not "redistributed"), the shares retain the $2,000/share cost basis.

The old (pre-ERISA) regs under IRC Sec. 402 may be of some help here. But under regular income tax rules for determining basis, basis is generally cost. Here there is no event that would require an adjustment to cost.