Can Testamentary Trust Elect 1042 Treatment

[Guest John Nelson]

Upon shareholder's death, his shares of Company stock were transferred in 2003 to Trust A and Trust B. Trust A and Trust B are irrevocable. Presumably, shares received a "step up" in basis at time of shareholder's death. Trustee of Trust A and Trust B proposes to sell shares to ESOP.

My thinking is that sale won't qualify for 1042 treatment because Trust A and Trust B have not owned the shares for at least 3 years. Since the shares received step up in basis at shareholder's death, it seems to me that the Trusts cannot tack their holding period to the shareholder's holding period.

Any thoughts? Thanks.

[mbozek]

There is a old IRS ruling from the 70s which held that there is no step in basis for employer stock because all amounts attributible to deferred comp are considered IRD under IRC 691©. Ruling might be found under the cites to 691©.