Inherited Stock from Employer Plan

[Randall]

Client inherited father's employer stock. Had stock transferred to her own brokerage account. Received 1099-R showing gross distribution $60k, taxable amount $10k and box 5 net unrealized appreciation in employer's securites $50k (round numbers). Later sold stock from brokerage account.

If the $10k from 1099-R is reported as ordinary income and she gets step up basis (FMV on date of death) on the stock sold, would she also get the $10k as added basis to her stock?

I'm not sure where to start to look this up.

[Guest Taxed]

Why was a 1099-R issued? It should be a 1099-B if it is a brokerage account?? Please acertain that because if it is a qualified plan (1099-R) the amount taxable is $10K.

Without knowing all the details, I would think that the general rule of stepped up basis applies here so the first thing to determine what was the actual FMV of the stock at the time of death. If it is a publicly traded stock that is relatively easy to figure out. Then I would ask what did she sell them for and waht was the cost of selling (broker fees etc.). Then it is a LT gain/loss calculation as usual because it is an inherited property hence LT.

[Lion EA]

But, if it was part of her father's retirement plan, I don't think it gets a step up. It's going to be ordinary income when she took it out.

[Randall]

Yes, Lion, ordinary income when she took it out and the 1099-R was issued. But when the stock was sold, the brokerage issued a 1099-B but didn't show basis. I believe the $10k is ordinary income but she still gets stepped up basis because she did inherit the stock. It would be as if the father didn't die, took the stock out of the plan, had to report $10k as ordinary income, then later sold, he would have cap gain, maybe short term, maybe long term if held long enough and his basis would be less. But she would get stepped up basis and it would be long term because she inherited the stock.

My question is would she also have the $10k as additional basis to the step up FMV.

[Lion EA]

No step up if it was in plan when he died/she inherited retirement funds. She did not inherit stock, she inherited a retirement plan. Distribution is ordinary income 1099-R. When she later sells it, her basis is amount she paid tax on, is it $10,000?

However, there are some additional rules when company stock is in a retirement plan, so you need to research that, if Box 5 increases her basis or Dad had already made an election re that. May apply only to Dad as she doesn't work for the company... Did company send any explanatory materials?

[Randall]

Thanks Lion, that's what I'm seeing elsewhere.