1042 Exchanges

[Guest Edward McElroy]

An individual owns 100% of the stock in Coproration A and 100% of the stock in Corporation B. Individual intends to sell stck in Corporation A to ESOP. Individual will use proceeds to purchase additional stock issued by Corporation B. Corporation A and corporation B are brother/sister controlled group. Will purchase of Corporation B stock constitute qualified replament property? Note that 1042 excludes only stock in parent/subsidiary controlled group. Any thoughts? Thanks. Ed

[Dawn Hafner]

Seems to me like it should be. Section 1042©(4)(A)(ii) specifically states only controlled groups within the meaning of 1563(a)(1) are not qualified securities. A brother-sister controlled group under 1563(a)(2) should qualify as long as it meets the other requirements. (i.e. passive investment income limits and "operating corporation" definition)