Non-Dividend Distributions

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  • #21450
    esetter
    Participant

    My son owns some stock in his non-public employer. His stock includes both exercised and the vested portion of restricted share units. On December 29, 2020 his company paid a non-dividend distribution which was reported on form 1099-DIV box 3 and explained on form 8937. In 2013, Kaye Thomas had an article about non-dividend distributions, but I don’t know whether that advice is still timely.

    With respect to the vested RSUs, the per-share distribution was less than the fair market value at the time of vesting. According to the article, the distribution will reduce my son’s basis in his vested RSUs and need not be reported on his 2020 tax return. The reduced basis will, however, be relevant in the year he sells these shares. Is this still accurate?

    His ISOs were all granted more than five years ago. Some were exercised in 2020; others more than a year before the non-dividend distribution date and two years after the grant date. Moreover, the per-share distribution was greater than the exercise price of all the exercised ISOs. Should the basis of the exercised ISOs be reduced to zero and the “excess” reported as a short-term and/or long-term capital gain? In this case, must the 2020 exercised ISO shares be reported as a short-term capital gain? Also, do any adjustments have to be made for AMT purposes?

    Thanks in advance for any insights you can give me.

    #22021
    esetter
    Participant

    I guess I could have asked the heart of this question more succinctly.

    ISO grants more than 5 years old, were exercised in 2020. Late in the year, a non-dividend distribution was made that exceeded the ISO strike price. In addition to reducing the ISO shares’ basis to zero, is the excess per share distribution a short or long-term capital gain? I assume it’s short-term, but the shares weren’t actually sold.

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