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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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My company has been sold and I have option with the ESOP plan

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My company has been sold and I have option with the ESOP plan to roll it over to IRA or take a distribution. I am 66. I would like to take a distribution. All of my shares were 'given' to me by the company over many years at no cost to me. I read one text at lawyers.com that indicated my basis would be the cost of the shares at the time I got them plus the gain due to the employer's share of the cost (100%). Basically, my basis would be the value of the stock at the time it is distributed. So I would have no capital gain. Does this sound right to you?

Lev :

Hi and welcome to our site!


As a ESOP participant - you may elect to roll the company stock into an IRA or may take a distribution of the stock. If stocks were sold before distribution - the distribution is taxed as an ordinary income - there is no choice.
Transfers of actual shares out of retirement account would be treated as distributions. Distributions are taxable. But if you distribute your employer's stocks - part of the distribution attributable to NUA will not be taxed unless you eventually sell these stocks. The NUA amount will be reported separately on form 1099R.
In some cases, such as for your employer's shares held in the retirement account - distributions qualify as a Net Unrealized Appreciation (NUA) distribution. In this case you are taxed only on the original cost of the company stock in the deferred retirement account, and then pay capital gains tax on the appreciation only when you sell the shares.


You may find additional information and examples about NUA distributions in this article -http://www.tuveinvestments.com/pdf/Retirement/Net%20unrealized%20appreciation.pdf
Customer:

the company plans to write a check to all employees. so we will not see any stock. would you agree then that there will be no capital gains to consider? I don't think there is anything i can do to avoid getting cash.

Lev :

When you will take distribution - either from 401k or IRA account - the distributed amount will be reported as your taxable income. If shares are sold BEFORE the distribution - there will no NUA - and the full amount will be taxable.
Your basis in this case will be only amounts you paid into ESOP with after tax money or the amount included into your income in previous years. If yes - that amount will be distributed tax free.
If none were contributed into ESOP with after tax funds - your basis is zero. In this case the full amount distributed will be taxed as ordinary income.

Lev :

The only saving on taxes possible in your situation if actual shares are distributed. In this case the tax liability will be partly deferred until shares are sold - and that part would be taxed as a capital gain at reduced rate.
If shares are sold before distribution - and your distribution will be in the form of cash - the fact of having shares in the ESOP account would not be relevant. Sorry if you expected differently.

Customer:

thanks. maybe i can talk the company into giving me the shares and then let me sell them right back for cash.

Lev :

That would be the best option if you want to use advantages of NUA. As that affects not you only but other employees - you might want to discuss the issue with others.

Customer:

one last thing. If I can get the shares as a distribution and the company paid $10 for a share years ago that is now worth $100 (and i sold the share right back for $100), would I be correct in saying I would pay full tax on $10 and capital gains on $90? Or would I still pay full tax on $100?

Lev :

Yes - that is correct - consider your example - if shares are distributed - $10 will be reported on 1099R as your ordinary income, and $90 will be capital gain when shares are sold.
This - if distribution takes place in 2013 - $10 will be reported as your 2013 income. But is shares will be sold on Jan 2, 2014 - $90 will be reported as 2014 income.

Customer:

thanks. looks like i need to start working on getting shares. I'm finished.

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