Can ESOP/sponsoring employer jeopardize 1042 treatment?

[Guest kredlin]

Can a selling shareholder's Sec. 1042 treatment be jeopardized by any actions of the ESOP or the sponsoring employee?

[BeckyMiller]

If the employer took very serious actions that put the entire plan at risk (qualification issues, prohibited transactions, etc.) the 1042 treatment might be lost, since the sale had to be made to a bona fide ESOP. However, in the current world of correction options from both the IRS and the DOL, it would be tough for the employer to mess up the seller's 1042 option.

Oops - almost forgot. The corporation does have to sign the form allowing the seller to take 1042. (Basically agreeing to be at risk for the early disposition excise tax.) If that was not done, the seller would lose their 1042 opportunity.

But... this is just the opinion of a lowly accountant. Let's see if one of the attorneys who offer help here will chime in.

[RLL]

kredlin ---

Nonrecognition treatment under IRC section 1042 is available only if the ESOP satisfies the requirements of sections 401(a) and 4975(e)(7) at the time of the sale. A qualification defect which is not corrected on a timely basis could result in section 1042 treatment not being available. Note that a defect in satisfying section 4975(e)(7), other than a 401(a) defect, is not presently eligible for correction under the IRS programs.

There are also numerous other requirements which must all be satified for 1042 to be available. included are the requirements that the employer consent to the potential excise taxes applicable to certain early dispositions of stock by the ESOP and to failure to comply with the allocation prohibitions under section 409(n).