Section 1042

[Scott]

Would Code Section 1042 apply if, as part of a C corporation's plan to reduce the number of shareholders and convert to an S corporation, an ESOP sponsored by the C corporation purchases stock from the shareholders? Is there any requirement that stock must continue to constitute "qualified securities" after the sale to the ESOP?

[RLL]

Section 1042 requires, in part, that the employer stock sold to an ESOP in a tax-deferred sale be stock of a C corporation. There is no statutory requirement that the issuing corporation remain a C corporation. After the sale, the ESOP can be one of the shareholders that consents to an S corporation election.