ESOP tax question concerning 1099R & 1099-B

[VINNY]

An employee retired and cashed out his ESOP. He sold all of the stock and rolled all of the proceeds into his traditional IRA within 60 days.

HIs company issued a 1099-R and 1099-B for the sale of this stock.

The 1099-R was entered into the tax software and a box was checked indicating ALL of the proceeds were rolled over to a traditional IRA within 60 days. This was completed, a no increase was shown in the federal tax owed.

Then the 1099-B was completed, and the software showed an increase in federal tax owed. Entering the 1099-B is in effect treating this transaction as if there was a distribution without a rollover to the traditional IRA.

An online search to remedy this problem offered this soloution:

No, it is not a taxable distribution. Assuming that the all of the proceeds of the sale and any other cash that might have been distributed with the ESOP shares were deposited into the IRA, in the follow-up to entering the Form 1099-R indicate that you moved the money to another retirement account and that you rolled over the entire amount. When entering the Form 1099-B, enter a cost basis equal to the amount of the sales proceeds. The result will be non capital gain or loss from the From 1099-B entry and none of the distribution reported on the Form 1099-R being taxable. The gross distribution amount shown in box 1 of the Form 1099-R will be included on Form 1040 line 16a but will be excluded from the amount on line 16b. TurboTax will put the word ROLLOVER next to this line.

The problem is this solution is for Turbo Tax, not Free Tax USA where this problem is occuring.

I did what Turbo Tax suggested in Free Tax USA but I'm concerned that I am entering info on a 1099-B that will be different than what the company is sending the IRS, which will be a 1099-B that does not show a cost basis.

Any suggestions, thanks.

[Alan S.]

What are the codes on the 1099R R, Box 7? Is there an amount in Box 6? Is the total distribution box checked?

[VINNY]

What are the codes on the 1099R R, Box 7? Is there an amount in Box 6? Is the total distribution box checked?

1099-R Box 7 is "7"
Box 6 is $19,955.52
Yes, the Total Distribution" box is checked

1099-R also shows;
Box 1 GROSS DISTRIBUTION shows $28,384.83 which is the amount that was rolled over.
Box 2a TAXABLE AMOUNT shows $8,429.21

[VINNY]

Form 1099-R contains detailed information specific to each recipient and outlined as follows:

The recipient account number is the Social Security number for the individual who received the distribution. For example, if a death benefit distribution was made to a participant’s beneficiary, the beneficiary’s Social Security number and address would be reported on Form 1099-R.
The gross distribution amount is reported under Box 1: the total amount of the distribution prior to any tax deductions withheld. The amount in Box 2A is the taxable amount of the distribution; the amount reported would be $0.00 if the distribution amount is transferred to a direct rollover account as the distribution amount is non-taxable under ESOP taxation rules.

I also found this article on line indicating that Box 2a of the 1099R should be $0.00 since it was a rollover. The 1099R is showing $8,921.21 in Box 2a

This gets more confusing

[Alan S.]

What are the codes on the 1099R R, Box 7? Is there an amount in Box 6? Is the total distribution box checked?

1099-R Box 7 is "7"
Box 6 is $19,955.52
Yes, the Total Distribution" box is checked

1099-R also shows;
Box 1 GROSS DISTRIBUTION shows $28,384.83 which is the amount that was rolled over.
Box 2a TAXABLE AMOUNT shows $8,429.21

The 1099R forms indicate that the ESOP shares were distributed to you as NUA shares and then sold. The sale might have been required by the ESOP to retain control of the shares. If you had stopped there, you would report the 8429 as taxable ordinary income on line 5a and 5b, and the 1099 B stock sale with a basis of 8429 and a LT cap gain (NUA shares) for the balance on Form 8949 and Sch D.

However, you then rolled over the proceeds of the sale of the NUA shares to your IRA. This voids the NUA treatment. If you did the rollover within 60 days of the ESOP distribution, you would report the entire 28,385 on line 5 of Form 1040, 0 on 5b and enter "rollover" next to 5b. No tax would be due. You would also have to report the 1099 B sale on Form 8949 showing the cost basis the same as the amount received and provide an explanatory statement that you sold shares distributed by the ESOP plan and rolled over the proceeds of the sale to your IRA. Again, this would eliminate any taxable income, but would also eliminate the use of the lower LTCG rate if you had not rolled over the proceeds.

Somewhat confusing for sure. If you knew that you were going to do an indirect 60 day rollover, you would normally have the ESOP redeem your shares and do a direct rollover of the cash to your IRA. Your 1099R would be different, would not show NUA in box 6, and there would be no 1099B issued. While probably a mistake on your part, you have eliminated taxes in 2022, but will eventually have to take RMDs from your IRA with this money and you will owe taxes on those RMDs in the future as full ordinary income rates.

[VINNY]

[Thread merged into here --admin LadyGeek]

When my mother retired she sold her company stock in her ESOP plan. The company was private so Vanguard could not transfer over the shares, so the company sold the shares and sent my mom a check from the sale in the amount of $28,284.83 We then sent Vanguard the money within 60 days and deposited the money in her traditional IRA.

Her basis is $8,429.31 and the Net unrealized appreciation is $19,955.52

The company issued her a 1099R and 1099B.

The tax software rep informed me I had to fill in the above basis on the 1099-B page of the software. She said the entire transaction was not tax free like I believed since we invested the money within 60 days.

This is confusing and here is my question.....

Since we sent Vanguard the entire check in the amount of $28,284.83 which was invested in her traditional IRA, how do we avoid double taxation on the $8,429.31 that she has to declare as her basis and pay taxes on her 2022 return ????

[Alan S.]

I responded to your first thread 2 days ago here:
viewtopic.php?p=7096971#p7096971

You should post any additional questions to that thread. Did you not see the response or just want additional comments from others?

[LadyGeek]

VINNY - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

This thread is now in the Personal Finance (Not Investing) forum (taxes).

The wiki has some background info: Net unrealized appreciation

(Thanks to the member who reported the post and provided a link to this thread.)