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Mark D
Mark D, Enrolled Agent
Category: Tax
Satisfied Customers: 1249
Experience:  MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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I am about to receive a distribution from an ESOP plan. The

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I am about to receive a distribution from an ESOP plan. The ESOP is held in company stock. I did not pay for the stock. I will receive a cash distribution each year for five years. Stock does not get sold in order to pay my distribution.
I have been told that if I take the cash distribution instead of rolling it over to an IRA or to my 401(k), it will be taxed as ordinary income.
My questions:
1) Is my distribution to be taxed as ordinary income and not capital gain?
2) If so, did Congress screw up by making this long term gain taxable as ordinary income instead of capital gain?


Are these qualified on non-qualified options?




Mark D

Customer: replied 7 years ago.
I don't think they are options at all. I received these shares, as all employees do, because our company is owned 30% by our ESOP. The amount of shares an employee receives is related to salary.

Thank you for the additional information, I am assuming the distributions are lump-sum.


First, you can indeed roll these over into a qualified plan to defer tax.


Second, this stock is taxed as ordinary income for the amount the ESOP paid for the shares. Your tax basis id the Fair Market Value (FMV) at the date of distribution less and unrealized appreciation that was not taxed on the distribution, or basically FMV less the amount you recognized as ordinary income.


Third, when the securities are sold, the gain up to the untaxed unrealized appreciation on the date of distribution is taxed as a long-term capital gain. Whether any additional gain is taxed as a long-term or short-term capital gain depends on how long the stock was held after distribution.


Please let me know if you have further questions.




Mark D



Customer: replied 7 years ago.

Thanks, XXXXX XXXXX the well thought out answer.


It is not a lump sum distribution.

I mentioned that it is paid of at 20% per year for five years.


Additionally, there is apparently no "sale" of specific securities. They are held by the ESOP, and each year the ownership % of each employee changes.


If the sales are not actually sold, and if this is not a lump sum, is the whole distribution taxed as ordinary income?



This is still considered an annual lump-sum distribution, so you shouldn't have worry about my answer differing. The only part that should be taxed as ordinary income is the amount the ESOP paid for the shares, whether sold or not.




Mark D

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