Employer Stock/401k withdrawal

[Tobey]

I have a client, age 61, (born 1945) who will be separating from his company this year. As part of the separation agreement he will receive a 12 month salary severence package, all to be received this year. This will place them (MFJ) well into the 25% tax bracket, with somewhat over $100k taxable income.

Client has a 401k, that among other investments has 2,000 shares of employer stock, current market value Of $60.00/share. He has an average basis of $8.00 in these shares.

The client's investment councellor/financial consultant has told me that he intends to withdraw these shares, and cash them in, and would like to know the best way to do this from a tax point of view. Clearly, he would like to have them taxed as LT Cap gains.

Is the following treatment correct?

If entire 401k is closed out, taking the employer stock in kind, TP has a lump sum distribution , with an NUA of (60-8)*2000 = $104,000 which should be reported in box 6 of his 1099.
He can then sell the shares, with LTCG tax treatment up to the amount of the NUA even if held in his name for less than 1 year.

TP cannot rollover any part of his 401k, else losing the Lump Sum and NUA treatment.
Without NUA treatment, gain from sale of stock would be treated as short term if held less than 1 year.

Remaining taxable portion of 401k payout will get hit at 28% rate or even 33% if TI exceeds $182,800. (I don't know the value of the rest of his 401k)

I think this is correct. My problem is that on page 20 of pub 575 the paragraph on NUA included in income, reference is made to an NUA worksheet for form 4972. This form, income averaging, is not available to my client because of his age. Do I just use the worksheet to calculate the CG on the NUA, and enter the sale directly on Schedule D?
So I am confused

Can anyone confirm the above approach, or set me straight if I have erred?

[Bees Knees]

My problem is that on page 20 of pub 575 the paragraph on NUA included in income, reference is made to an NUA worksheet for form 4972. This form, income averaging, is not available to my client because of his age. Do I just use the worksheet to calculate the CG on the NUA, and enter the sale directly on Schedule D?

The worksheet for Form 4972 does not apply, because your client does not qualify for lump sum distribution treatment. So ignore that portion of page 20, Pub 575.

You simply would report the NUA gain on Schedule D when the stock is sold using the taxable portion of the 1099-R as your basis, and the box 6, 1099-R amount as your LTCG, assuming the value did not drop after the stock was distributed. Any additional gain over the amount listed in box 6 is LT or ST, depending on how long the stock was held after being distributed. Pub 575, page 14 explains all of that.

[Bees Knees]

What might be confusing you is there is the 10-year averaging and LTCG election for lump-sum distributions, that only people born before Jan 2, 1936 qualify for.

Then there is the LTCG treatment on the Net Unrealized Appreciation portion of employer securities that you get when you have employer securities distributed rather than cashing them in first and having cash distributed. You don't have to be born before Jan 2, 1936 to qualify for that. Pub 575 talks about both on pages 14 and 20.