It sounds like you are trying to find a form to overcome the economic substance of events. Economically, your client will be getting $50,000 from the ESOP for his current use. The intent of the law is that the $50,000 should first be the taxable portion of the ESOP value, and only then any NUA. I think the doctrine of substance over form precludes getting capital gains ahead of ordinary income. Here is one guy's take on the matter that supports my comments. LINK

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Posted by slackster

Houston

Member since Mar 2009

85136 posts

Posted on 1/22/15 at 12:39 pm to Poodlebrain

Poodle, I appreciate your feedback and I've read your link. Like most NUA articles, it deals with a full distribution or a full rollover, not both.

This is an excerpt from one of the links I've found on the matter:

quote:
Basis Allocation Twist

When Jane moves only a portion of the company stock, she needs to allocate the basis between the NUA stock and that which was rolled over. Since, in our example, the basis was $100,000 and the total company stock was worth $200,000, Jane could elect to rollover only $100,000 worth of the stock to her IRA (along with the other $300,000 of funds), allocating the basis of $100,000 to the rolled over stock. Then, when the remaining $100,000 of stock is moved from the 401(k) to the taxable account, there is no basis to be taxed at ordinary income tax rates. The entire transaction has occurred without tax – and when Jane sells the stock, the entire value is taxed at capital gains rates.

This move is allowed because the tax law states that when there is a partial rollover of an account into an IRA, the rolled portion is “treated as consisting first of the portion that is includible in gross income” – meaning the basis in the stock, plus the other funds in the account.

LINK

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