26 U.S.C. § 1042: Sales of stock to employee stock ownership plans or certain cooperatives

the taxpayer or executor elects in such form as the Secretary may prescribe the application of this section with respect to any sale of qualified securities, the taxpayer purchases qualified replacement property within the replacement period, and the requirements of subsection (b) are met with respect to such sale, an employee stock ownership plan (as defined in section 4975(e)(7)), or an eligible worker-owned cooperative. each class of outstanding stock of the corporation (other than stock described in section 1504(a)(4)) which issued the qualified securities, or the total value of all outstanding stock of the corporation (other than stock described in section 1504(a)(4)). The taxpayer files with the Secretary the written statement described in subparagraph (B). the employer whose employees are covered by the plan described in paragraph (1), or any authorized officer of the cooperative described in paragraph ( l ), 1 1 So in original. Probably should be “paragraph (1),”. The taxpayer’s holding period with respect to the qualified securities is at least 3 years (determined as of the time of the sale). are issued by a domestic C corporation that has no stock outstanding that is readily tradable on an established securities market, and a distribution from a plan described in section 401(a), or a transfer pursuant to an option or other right to acquire stock to which section 83, 422, or 423 applied (or to which section 422 or 424 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) applied). to which part I of subchapter T applies, a majority of the membership of which is composed of employees of such organization, a majority of the voting stock of which is owned by members, a majority of the board of directors of which is elected by the members on the basis of 1 person 1 vote, and patronage, capital contributions, or some combination of clauses (i) and (ii). The term “replacement period” means the period which begins 3 months before the date on which the sale of qualified securities occurs and which ends 12 months after the date of such sale. did not, for the taxable year preceding the taxable year in which such security was purchased, have passive investment income (as defined in section 1362(d)(3)(C)) in excess of 25 percent of the gross receipts of such corporation for such preceding taxable year, and is not the corporation which issued the qualified securities which such security is replacing or a member of the same controlled group of corporations (within the meaning of section 1563(a)(1)) as such corporation. The term “operating corporation” means a corporation more than 50 percent of the assets of which were, at the time the security was purchased or before the close of the replacement period, used in the active conduct of the trade or business. any financial institution described in section 581, and an insurance company subject to tax under subchapter L. the corporation issuing the security owns stock representing control of 1 or more other corporations, 1 or more other corporations own stock representing control of the corporation issuing the security, or both, For purposes of clause (i), the term “control” has the meaning given such term by section 304(c). In determining control, there shall be disregarded any qualified replacement property of the taxpayer with respect to the section 1042 sale being tested. For purposes of this paragraph, the term “security” has the meaning given such term by section 165(g)(2), except that such term shall not include any security issued by a government or political subdivision thereof. No sale of securities by an underwriter to an employee stock ownership plan or eligible worker-owned cooperative in the ordinary course of his trade or business as an underwriter, whether or not guaranteed, shall be treated as a sale for purposes of subsection (a). An election under subsection (a) shall be filed not later than the last day prescribed by law (including extensions thereof) for filing the return of tax imposed by this chapter for the taxable year in which the sale occurs. Subsection (a) shall not apply to any gain on the sale of any qualified securities which is includible in the gross income of any C corporation. the numerator of which is the cost of such item of property, and the denominator of which is the total cost of all such items of property. If a taxpayer disposes of any qualified replacement property, then, notwithstanding any other provision of this title, gain (if any) shall be recognized to the extent of the gain which was not recognized under subsection (a) by reason of the acquisition by such taxpayer of such qualified replacement property. a corporation issuing qualified replacement property disposes of a substantial portion of its assets other than in the ordinary course of its trade or business, and any taxpayer owning stock representing control (within the meaning of section 304(c)) of such corporation at the time of such disposition holds any qualified replacement property of such corporation at such time, in any reorganization (within the meaning of section 368) unless the person making the election under subsection (a)(1) owns stock representing control in the acquiring or acquired corporation and such property is substituted basis property in the hands of the transferee, by reason of the death of the person making such election, by gift, or in any transaction to which section 1042(a) applies. the taxpayer’s cost of purchasing qualified replacement property which the taxpayer claims results in nonrecognition of any part of such gain, the taxpayer’s intention not to purchase qualified replacement property within the replacement period, or a failure to make such purchase within the replacement period, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment. This section shall apply to the sale of stock of a qualified refiner or processor to an eligible farmers’ cooperative. substantially all of the activities of which consist of the active conduct of the trade or business of refining or processing agricultural or horticultural products, and farmers who make up the eligible farmers’ cooperative which is purchasing stock in the corporation in a transaction to which this subsection is to apply, or such cooperative. For purposes of this section, the term “eligible farmers’ cooperative” means an organization to which part I of subchapter T applies and which is engaged in the marketing of agricultural or horticultural products. the eligible farmers’ cooperative shall be treated in the same manner as a cooperative described in subsection (b)(1)(B), subsection (b)(2) shall be applied by substituting “100 percent” for “30 percent” each place it appears, the determination as to whether any stock in the domestic corporation is a qualified security shall be made without regard to whether the stock is an employer security or to subsection (c)(1)(A), and paragraphs (2)(D) and (7) of subsection (c) shall not apply. The amendment made by subparagraph (A) [amending this section] shall apply to sales after March 28, 1985 , except that such amendment shall not apply to sales made before July 1, 1985 , if made pursuant to a binding contract in effect on March 28, 1985 , and at all times thereafter. a commitment letter was issued by a bank on October 31, 1984 , and a final purchase agreement was entered into on November 5, 1985 . In the case of a sale on September 27, 1985 , with respect to which a preliminary commitment letter was issued by a bank on April 10, 1985 , and with respect to which a commitment letter was issued by a bank on June 28, 1985 , the amendment made by subparagraph (A) shall apply but such sale shall be treated as having occurred on September 27, 1986 .” The requirement that section 1042(b) of the Internal Revenue Code of 1954 [now 1986] shall be applied with regard to section 318(a)(4) of such Code shall apply to sales after May 6, 1986 . In the case of sales after July 18, 1984 , and before the date of the enactment of this Act [ Oct. 22, 1986 ], paragraph (2) of section 1042(b) of such Code shall apply as if it read as follows: “ ‘(2) Employees must own 30 percent of stock after sale .—The plan or cooperative referred to in paragraph (1) owns, immediately after the sale, at least 30 percent of the employer securities or 30 percent of the value of employer securities (within the meaning of section 409(1)) outstanding at the time of sale.’ ” before January 1, 1987 , the taxpayer acquired any security (as defined in section 165(g)(2) of the Internal Revenue Code of 1954 [now 1986]) issued by a domestic corporation or by any State or political subdivision thereof, the taxpayer treated such security as qualified replacement property for purposes of section 1042 of such Code, and such property does not meet the requirements of section 1042(c)(4) of such Code (as amended by subparagraph (A)),