IRA: Basis of Stock Receiv’d as 100% “In-Kind” IRA
Facts: Client will be receiving $1M+ stock (publicly traded) from mother’s IRA as a lump sum distribution. Client (and her entire family) are extremely loyal to this publicly traded stock and do not want to sell the shares if at all possible. I also advised client of stretch IRA options, but she wants to proceed with lump sum distribution of the stock “in-kind”. As a result, client will have $1M taxable income (per 1099R) upon receipt of the of the in-kind stock distribution and have to pay the resulting taxes. My question is this: After receiving the in-kind distribution of $1M+ in stock and paying tax on $1M+ taxable income, what will be her basis in the stock? $1M or zero (since the stock was IRD in the mother’s IRA upon her death). I have never had this issue come up before because clients either elected for cash lump sum distribution or elected to hold assets in Deceased IRA Owner arrangement (stretch IRA). Seems to me that logic and general fairness would require that my client’s basis would be equal to the $1M+ taxable income that she reported (and paid tax on) when she received the in-kind distribution of stock. However, I can’t find any authority on point and who ever said the Internal Revenue Code was fair? If my presumed answer is wrong, then we could always just sell the stock in the IRA, take the 100% cash distribution, and then re-purchase the stock with the net after-tax cash distribution. Obviously, this is not the worst alternative in the world, except for the commissions it could be lost to the stock broker.
Any thoughts would be greatly appreciated. Thanks in advance.
Brad Gornto
Permalink Submitted by Alan Spross on Thu, 2007-12-13 02:17
Brad,
You are correct. The tax basis for the shares in a taxable account would be the fair market value of the shares upon distribution from the plan, even if there were an inherited non deductible basis in the IRA resulting in tax less than the value distributed. So you do not have to worry about a -0- basis. The holding period begins on the date of the distribution. Note that IRD assets may also qualify client for a misc itemized deduction if mother had a federal estate tax liability.
A couple red flags here are the high marginal rates she will incur on this LSD, and even worse, the exposure resulting from having all her eggs in one basket if she does not promptly sell the shares and diversify. Typically, the stretch applied to her non spouse RMDs would be a wiser decision unless she has very large loss carryovers or deductions to apply against all this ordinary income.
Permalink Submitted by Brad Gornto on Thu, 2007-12-13 15:51
Alan:
Thanks for your reply. Again, this has to be the correct result. Do you have any authority (Regs, rulings) readily available to support this position?
I appreciate your tax advice for my client, which I have previously discussed with her. I kept the facts simple in my original post, but my client (100% IRA Benenficiary) is actually a trustee of trust (w/5 benes), so her trustee duties, and the needs of the five beneficiaries are also part of the reason she is taking 100% lump sum distribution and incurring the tax hit.
Thanks again, let me know if you have any authority readily available on the basis issue.
Brad