Frequently Asked Questions
Who is eligible for the ESOP Disposition Tax Exceptions?
Applies to employers or cooperatives that have acquired securities in a section 1042 sale or 664(g) transfer and need to dispose of them within 3 years.
How does the ESOP Disposition Tax Exceptions work?
Avoid the 10% excise tax on early dispositions of ESOP securities by structuring the transfer as a distribution due to death, disability, retirement after age 59.5, or a qualified corporate reorganization.
What law authorizes the ESOP Disposition Tax Exceptions?
The ESOP Disposition Tax Exceptions is authorized under IRC §4978 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §4978
Source: Internal Revenue Code, Title 26, United States Code
§ 4978. Tax on certain dispositions by employee stock ownership plans and certain cooperatives(a) Tax on dispositions of securities to which section 1042 applies before close of minimum holding periodIf, during the 3-year period after the date on which the employee stock ownership plan or eligible worker-owned cooperative acquired any qualified securities in a sale to which section 1042 applied or acquired any qualified employer securities in a qualified gratuitous transfer to which section 664(g) applied, such plan or cooperative disposes of any qualified securities and—(1) the total number of shares held by such plan or cooperative after such disposition is less than the total number of employer securities held immediately after such sale, or
(2) except to the extent provided in regulations, the value of qualified securities held by such plan or cooperative after such disposition is less than 30 percent of the total value of all employer securities as of such disposition (60 percent of the total value of all employer securities as of such disposition in the case of any qualified employer securities acquired in a qualified gratuitous transfer to which section 664(g) applied),
there is hereby imposed a tax on the disposition equal to the amount determined under subsection (b).
(b) Amount of tax(1) In generalThe amount of the tax imposed by subsection (a) shall be equal to 10 percent of the amount realized on the disposition.
(2) LimitationThe amount realized taken into account under paragraph (1) shall not exceed that portion allocable to qualified securities acquired in the sale to which section 1042 applied or acquired in the qualified gratuitous transfer to which section 664(g) applied determined as if such securities were disposed of—(A) first from qualified securities to which section 1042 applied or to which section 664(g) applied acquired during the 3-year period ending on the date of the disposition, beginning with the securities first so acquired, and
(B) then from any other employer securities.
If subsection (d) applies to a disposition, the disposition shall be treated as made from employer securities in the opposite order of the preceding sentence.
(3) Distributions to employeesThe amount realized on any distribution to an employee for less than fair market value shall be determined as if the qualified security had been sold to the employee at fair market value.
(c) Liability for payment of taxesThe tax imposed by this subsection shall be paid by—(1) the employer, or
(2) the eligible worker-owned cooperative,
that made the written statement described in section 664(g)(1)(E) or in section 1042(b)(3) (as the case may be).
(d) Section not to apply to certain dispositions(1) Certain distributions to employeesThis section shall not apply with respect to any distribution of qualified securities (or sale of such securities) which is made by reason of—(A) the death of the employee,
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