Section 1042 Tax-free Exchanges

[Guest TDeckert]

Since Section 1042 is not applicable to sales of S-Corp stock, is it otherwise possible for an S-Corp shareholder to sell shares to an ESOP on a tax-free basis? If so, what is the authority for this?

[Guest GBMcGrath]

I,too, am interested in the answer to this issue. I know of an individual who has been advised by an "ESOP consultant" that he can do a 1042 transaction with an S corp. I don't see how, given IRC section 1042(©(1)(A), so I'm wondering if the consultant is talking about something else.

[RLL]

A shareholder may sell employer stock to an S corporation ESOP on a tax-free basis if his/her basis in the stock is equal to (or in excess of) the sales price. Such a tax-free sale is not subject to the requirements under IRC Section 1042.

[Guest jppcpa]

Quick reminder on semantics: Section 1042 allows for tax-deferral, not tax-free income. The consultant was probably talking about establishing the ESOP after terminating the S election (since 1042 is only available to C corps). It may be possible to re-elect S status after the ESOP has purchased the stock. Normal waiting period is 5 years for re-election, but the IRS has waived this requirement under similar circumstances. I suspect the Service will stop doing so, if it becomes too popular

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