The amount of net unrealized appreciation which is excludable under the regulations of (A) and (B) of this subdivision shall not be included in the basis of the securities in the hands of the distributee at the time of distribution for purposes of determining gain or loss on their subsequent disposition. In the case of a total distribution the amount of net unrealized appreciation which is not included in the basis of the securities in the hands of the distributee at the time of distribution shall be considered as a gain from the sale or exchange of a capital asset held for more than six months to the extent that such appreciation is realized in a subsequent taxable transaction. However, if the net gain realized by the distributee in a subsequent taxable transaction exceeds the amount of the net unrealized appreciation at the time of distribution, such excess shall constitute a long-term or short-term capital gain depending upon the holding period of the securities in the hands of the distributee.
Shares | Purchase date | Cost per share | Total cost |
20 | June 24, 1954 | $101 | $2,020 |
40 | Jan. 10, 1953 | 102 | 4,080 |
20 | Oct. 20, 1952 | 95 | 1,900 |
80 | 8,000 |
B, a distributee who makes his income tax returns on the basis of a calendar year, receives on October 31, 1954, in a total distribution, to which paragraph (a)(6) of this section is applicable, 20 shares of class E stock of the employer corporation. The specified inventory date of the trust is the last day of each calendar year. The trust had on hand on December 31, 1952, 1,000 shares of class E stock of the employer corporation. During the calendar year 1953 the trust distributed to four distributees a total of 100 shares of such stock and acquired, through a number of purchases, a total of 120 shares. The average cost of the 20 shares distributed to B, on the basis of the moving average method, is $52 computed as follows:
Shares | Total cost | Average cost | |
On hand Dec. 31, 1952 | 1,000 | $50,000 | $50 |
Distributed during 1953 at average cost of $50 | 100 | 5,000 | (0) |
900 | 45,000 | (0) | |
Purchased during 1953 | 120 | 8,000 | (0) |
On hand Dec. 31, 1953 | 1,020 | 53,040 | 52 |
Example. A trust distributes ten shares of stock issued by the employer corporation each of which has an average cost to the trust of $100, consisting of employee contributions in the amount of $60 and employer contributions in the amount of $40, and on the date of distribution has a fair market value of $180. The portion of the net unrealized appreciation attributable to the contributions of the employee with respect to each of the shares of stock is $48 computed as follows:
(1) Value of one share of stock on distribution date | $180 |
(2) Employee contributions | 60 |
(3) Employer contributions | 40 |
(4) Total contributions | 100 |
(5) Net unrealized appreciation | 80 |
(6) Portion of net unrealized appreciation attributable to employee contributions 60/100 (amount of employee contributions (item 2) over total contributions (item 4) of $80 (item 5) | 48 |
(a) Employee contributions | $60 |
(b) Employer contributions (taxable as ordinary income in the year the securities were distributed) | 40 |
(c) Portion of net unrealized appreciation attributable to employer contributions (item 5) minus (item 6) (taxable as ordinary income in the year the securities were distributed) | 32 |
(d) Basis of stock | 132 |
The amount of such a distribution that is includible in the gross income of the nonresident alien individual under section 402(a) (1) or (2) shall not exceed an amount which bears the same ratio to the amount which would be includible in gross income if it were not for this paragraph, as-
See section 402(a)(4). See, also, paragraph (a) of this section for rules relating to the amount that is includible in gross income under section 402(a) (1) or (2) in the case of a distribution under a pension plan described in section 401(a).
(i) Amount of distribution includible in gross income under section 72 without regard to section 402(a)(4) | $60 |
(ii) Aggregate basic salary for services for United States | 100,000 |
(iii) Aggregate basic salary for services for United States reduced by amount of such salary not includible in A's gross income by reason of being from sources without the United States | 0 |
(iv) Amount includible in A's gross income under section 402(a)(1) ((iii) ÷ (ii) * (i), or $0/$100,000 * $60) | 0 |
B, a retired employee of the United States who performed services for the United States both in a foreign country and in the United States, receives, in respect of such services, a monthly pension of $240 under the Civil Service Retirement Act. B received an aggregate basic salary for his services for the United States of $120,000; $80,000 of which was for his services performed in the United States, and $40,000 of which was for his services performed in the foreign country. B was a nonresident alien individual during the whole of his employment with the United States and, consequently, the $40,000 basic salary for his services performed in the foreign country was not includible in his gross income by reason of being from sources without the United States. B would be required, under section 72 but without regard to section 402(a)(4) and this paragraph, to include $165 of each monthly pension in his gross income. The amount that is includible in B's gross income under section 402(a)(1) with respect to the monthly payments received during taxable years beginning after December 31, 1959, and while B is a nonresident alien individual, is computed as follows:
(i) Amount of distribution includible in gross income under section 72 without regard to section 402(a)(4) | $165 |
(ii) Aggregate basic salary for services for United States | 120,000 |
(iii) Aggregate basic salary for services for United States reduced by amount of such salary not includible in B's gross income by reason of being from sources without the United States ($120,000-$40,000) | 80,000 |
(iv) Amount includible in B's gross income under section 402(a)(1)(iii) ÷ (ii) * (i), or $80,000/$120,000 * $165) | 110 |
26 C.F.R. §1.402(a)-1
For FEDERAL REGISTER citations affecting § 1.402(a)-1 , see the List of CFR Sections Affected, which appears in the Finding Aids section of the printed volume and at www.govinfo.gov.