Prohibited accrual in 1042 transaction?

[david rigby]

A shareholder has elected non-recognition under IRC 1042. The shareholder remains an active employee and a participant in the ESOP and does not share in the allocation of stock subject to the 1042 election. Shares allocated to terminated vested participants are distributed to and reregistered in the name of the terminated vested participant. If the ESOP reacquires this same stock, is the selling shareholder prohibited from receiving an allocation of the reacquired stock?

Cites?

[RLL]

No.

IRC section 409(n)(1) applies the special allocation restrictions only to "...employer securities acquired by the plan...in a sale to which section 1042 applies..."

[Kirk Maldonado]

RLL:

Do you believe that the holdings of PLR 90-01-035 are no longer valid because of the change in the statutory language regarding non-allocations?

[RLL]

Hi Kirk ---

I don't know what PLR 90-01-035 said.

But I do know what IRC section 409(n)(1) says. And according to the stated facts here, those shares were not acquired by the ESOP in a 1042 transaction. The shares lose the 409(n)/1042 "taint" when distributed from the ESOP and then repurchased by the ESOP in a non-1042 transaction. So the selling shareholder can receive his pro-rata share of the allocation of the reacquired stock.