Amended 1980, 2001, 2014
- 2014 Pub. L. 113-295 Pub. L. 113–295 struck out subsec. (q) which related to cross-references.
- 2001 Pub. L. 107-16 Pub. L. 107–16 added subsec. (p) and redesignated former subsec. (p) as (q).
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(L)(v)(VII), substituted “tax credit employee stock ownership plans” for “ESOPS” in section catchline.
Final rules 1
(a) Tax credit employee stock ownership plan defined Except as otherwise provided in this title, for purposes of this title, the term “tax credit employee stock ownership plan” means a defined contribution plan which—
(1) meets the requirements of section 401(a),
(2) is designed to invest primarily in employer securities, and
(3) meets the requirements of subsections (b), (c), (d), (e), (f), (g), (h), and (o) of this section.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1174(b)(2), inserted reference to subsec. (o).
Amended 1980
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(L)(ii)(I), (v)(VI), substituted in heading and in text “tax credit employee stock ownership plan” for “ESOP”.
Cited by 14
(b) Required allocation of employer securities
Amended 1981
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 331(c)(1)(A), (B), inserted in par. (1)(A) reference to section 44G(c)(1)(B), and inserted in par. (4) “or the credit allowed under section 44G (relating to the employee stock ownership credit)” after “basic employee plan credit”.
Cited by 1
(1) In general A plan meets the requirements of this subsection if—
(A) the plan provides for the allocation for the plan year of all employer securities transferred to it or purchased by it (because of the requirements of section 41(c)(1)(B)) [OLRC note: See References in Text note below.] to the accounts of all participants who are entitled to share in such allocation, and
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(15)(A), (B), substituted “41” for “44G” and struck out “48(n)(1)(A) or” after “requirements of section”.
(B) for the plan year the allocation to each participant so entitled is an amount which bears substantially the same proportion to the amount of all such securities allocated to all such participants in the plan for that year as the amount of compensation paid to such participant during that year bears to the compensation paid to all such participants during that year.
“Substantially” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)
Cited by 2
(2) Compensation in excess of $100,000 disregarded For purposes of paragraph (1), compensation of any participant in excess of the first $100,000 per year shall be disregarded.
(3) Determination of compensation For purposes of this subsection, the amount of compensation paid to a participant for any period is the amount of such participant’s compensation (within the meaning of section 415(c)(3)) for such period.
(4) Suspension of allocation in certain cases Notwithstanding paragraph (1), the allocation to the account of any participant which is attributable to the basic employee plan credit or the credit allowed under section 41 1 (relating to the employee stock ownership credit) may be extended over whatever period may be necessary to comply with the requirements of section 415.
Amended 1980, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(15)(A), substituted “41” for “44G”.
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(L)(iii)(V), substituted “employee plan credit” for “ESOP credit”.
(c) Participants must have nonforfeitable rights A plan meets the requirements of this subsection only if it provides that each participant has a nonforfeitable right to any employer security allocated to his account.
Cited by 1
(d) Employer securities must stay in the plan A plan meets the requirements of this subsection only if it provides that no employer security allocated to a participant’s account under subsection (b) (or allocated to a participant’s account in connection with matched employer and employee contributions) may be distributed from that account before the end of the 84th month beginning after the month in which the security is allocated to the account. To the extent provided in the plan, the preceding sentence shall not apply in the case of—
Amended 1980, 1981, 1986, 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(j)(3), inserted “or to any distribution or reinvestment required under section 401(a)(28)” after “under section 401(a)(9)”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1899A(11), substituted “participant’s” for “participants’s”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1852(a)(4)(B), inserted at end “This subsection shall not apply to any distribution required under section 401(a)(9).”
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 337, designated provision relating to death, disability, or separation from service as par. (1) and added pars. (2) and (3).
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(F), inserted “(or allocated to a participant’s account in connection with matched employer and employee contributions)” after “under subsection (b)”.
Cited by 3
(1) death, disability, separation from service, or termination of the plan;
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1174(a)(1), substituted “separation from service, or termination of the plan” for “or separation from service”.
(2) a transfer of a participant to the employment of an acquiring employer from the employment of the selling corporation in the case of a sale to the acquiring corporation of substantially all of the assets used by the selling corporation in a trade or business conducted by the selling corporation, or
Amended 1983
- 1983 Pub. L. 97-448 Pub. L. 97–448, § 103(i), struck out provisions covering the sale of substantially all of the stock of a subsidiary of the employer.
(3) with respect to the stock of a selling corporation, a disposition of such selling corporation’s interest in a subsidiary when the participant continues employment with such subsidiary.
This subsection shall not apply to any distribution required under section 401(a)(9) or to any distribution or reinvestment required under section 401(a)(28).
(e) Voting rights
Cited by 2
(1) In general A plan meets the requirements of this subsection if it meets the requirements of paragraph (2) or (3), whichever is applicable.
(2) Requirements where employer has a registration-type class of securities If the employer has a registration-type class of securities, the plan meets the requirements of this paragraph only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which securities of the employer which are entitled to vote and are allocated to the account of such participant or beneficiary are to be voted.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(f)(1)(C), (D), inserted “or beneficiary” after “participant” in two places and substituted “securities of the employer” for “employer securities”.
Cited by 1
(3) Requirement for other employers If the employer does not have a registration-type class of securities, the plan meets the requirements of this paragraph only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which voting rights under securities of the employer which are allocated to the account of such participant or beneficiary are to be exercised with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as the Secretary may prescribe in regulations.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(f)(1)(B)–(D), inserted “or beneficiary” after “participant” in two places and substituted “securities of the employer” for “employer securities” and “any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as the Secretary may prescribe in regulations” for “a corporate matter which (by law or charter) must be decided by more than a majority vote of outstanding common shares voted”.
Cited by 2
(4) Registration-type class of securities defined For purposes of this subsection, the term, “registration-type class of securities” means—
Cited by 1
(A) a class of securities required to be registered under section 12 of the Securities Exchange Act of 1934, and
(B) a class of securities which would be required to be so registered except for the exemption from registration provided in subsection (g)(2)(H) of such section 12.
(5) 1 vote per participant A plan meets the requirements of paragraph (3) with respect to an issue if—
Amended 1986, 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1018(t)(4)(H), substituted “paragraph (3)” for “paragraph (2) or (3)”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(f)(1)(A), added par. (5).
(A) the plan permits each participant 1 vote with respect to such issue, and
Cited by 1
(B) the trustee votes the shares held by the plan in the proportion determined after application of subparagraph (A).
(f) Plan must be established before employer’s due date
(1) In general A plan meets the requirements of this subsection only if it is established on or before the due date (including any extension of such date) for the filing of the employer’s tax return for the first taxable year of the employer for which an employee plan credit is claimed by the employer with respect to the plan.
Amended 1980
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(I)(i), substituted “only if it is established on or before the due date (including any extension of such date) for the filing of the employer’s tax return for the first taxable year of the employer for which an employee plan credit is claimed by the employer with respect to the plan” for “for a plan year only if it is established on or before the due date for the filing of the employer’s tax return for the taxable year (including any extension of such date) in which or with which the plan year ends”.
(2) Special rule for first year A plan which otherwise meets the requirements of this section shall not be considered to have failed to meet the requirements of section 401(a) merely because it was not established by the close of the first taxable year of the employer for which an employee plan credit is claimed by the employer with respect to the plan.
Amended 1980
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(I)(ii), (L)(v)(VII), substituted “employee plan” for “ESOP” and inserted “with respect to the plan” after “by the employer”.
(g) Transferred amounts must stay in plan even though investment credit is redetermined or recaptured A plan meets the requirement of this subsection only if it provides that amounts which are transferred to the plan (because of the requirements of section 48(n)(1) or 41(c)(1)(B)) 1 shall remain in the plan (and, if allocated under the plan, shall remain so allocated) even though part or all of the employee plan credit or the credit allowed under section 41 1 (relating to employee stock ownership credit) is recaptured or redetermined. For purposes of the preceding sentence, the references to section 48(n)(1) 1 and the employee plan credit shall refer to such section and credit as in effect before the enactment of the Tax Reform Act of 1984.
Amended 1980, 1981, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(15)(A), (C), substituted “41” for “44G” in two places, and inserted provision directing that, for purposes of the preceding sentence, the references to section 48(n)(1) and the employee plan credit shall refer to such section and credit as in effect before the enactment of the Tax Reform Act of 1984.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 331(c)(1)(C), (D), inserted reference to section 44G(c)(1)(B) and inserted “or the credit allowed under section 44G (relating to employee stock ownership credit)” after “employee plan credit”.
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(L)(iii)(V), substituted “employee plan credit” for “ESOP credit”.
(h) Right to demand employer securities; put option
Cited by 10
(1) In general A plan meets the requirements of this subsection if a participant who is entitled to a distribution from the plan—
(A) has a right to demand that his benefits be distributed in the form of employer securities, and
Cited by 3
(B) if the employer securities are not readily tradable on an established market, has a right to require that the employer repurchase employer securities under a fair valuation formula.
Cited by 7
Cited by 1
(2) Plan may distribute cash in certain cases
Amended 1980, 1981, 1983, 1986, 1988, 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34 designated existing provisions as subpar. (A), inserted subpar. heading, struck out “In the case of an employer whose charter or bylaws restrict the ownership of substantially all outstanding employer securities to employees or to a trust described in section 401(a), a plan which otherwise meets the requirements of this subsection or section 4975(e)(7) shall not be considered to have failed to meet the requirements of this subsection or of section 401(a) merely because it does not permit a participant to exercise the right described in paragraph (1)(A) if such plan provides that participants entitled to a distribution from the plan shall have a right to receive such distribution in cash, except that such plan may distribute employer securities subject to a requirement that such securities may be resold to the employer under terms which meet the requirements of paragraph (1)(B).” after “employer securities.”, and added subpar. (B).
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1018(t)(4)(B), substituted “paragraph (1)(B)” for “section 409(o)”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(f)(3)(C), inserted “, except that such plan may distribute employer securities subject to a requirement that such securities may be resold to the employer under terms which meet the requirements of section 409(o)”.
- 1983 Pub. L. 97-448 Pub. L. 97–448, § 103(h), substituted “the requirements of this subsection or of section 401(a)” for “the requirements of section 401(a)”.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 334, substituted “this subsection” for “this section” and inserted provision respecting receipt of distributions in cash where employer’s charter or bylaws restrict ownership of substantially all outstanding employer securities to employees or to a section 401(a) trust where a participant is not permitted to exercise the right described in par. (1)(A).
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(E), inserted “or of section 4975(e)(7)” after “the requirements of this section”.
Cited by 1
(A) In general A plan which otherwise meets the requirements of this subsection or of section 4975(e)(7) shall not be considered to have failed to meet the requirements of section 401(a) merely because under the plan the benefits may be distributed in cash or in the form of employer securities.
(B) Exception for certain plans restricted from distributing securities
(i) In general A plan to which this subparagraph applies shall not be treated as failing to meet the requirements of this subsection or section 401(a) merely because it does not permit a participant to exercise the right described in paragraph (1)(A) if such plan provides that the participant entitled to a distribution has a right to receive the distribution in cash, except that such plan may distribute employer securities subject to a requirement that such securities may be resold to the employer under terms which meet the requirements of paragraph (1)(B).
(ii) Applicable plans This subparagraph shall apply to a plan which otherwise meets the requirements of this subsection or section 4975(e)(7) and which is established and maintained by—
(I) an employer whose charter or bylaws restrict the ownership of substantially all outstanding employer securities to employees or to a trust described in section 401(a), or
“Substantially” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)
(II) an S corporation.
(3) Special rule for banks In the case of a plan established and maintained by a bank (as defined in section 581) which is prohibited by law from redeeming or purchasing its own securities, the requirements of paragraph (1)(B) shall not apply if the plan provides that participants entitled to a distribution from the plan shall have a right to receive a distribution in cash.
Amended 1981
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 336, added pars. (3) and (4).
(4) Put option period An employer shall be deemed to satisfy the requirements of paragraph (1)(B) if it provides a put option for a period of at least 60 days following the date of distribution of stock of the employer and, if the put option is not exercised within such 60-day period, for an additional period of at least 60 days in the following plan year (as provided in regulations promulgated by the Secretary).
Amended 1981
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 336, added pars. (3) and (4).
Cited by 2
(5) Payment requirement for total distribution If an employer is required to repurchase employer securities which are distributed to the employee as part of a total distribution, the requirements of paragraph (1)(B) shall be treated as met if—
(A) the amount to be paid for the employer securities is paid in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than 30 days after the exercise of the put option described in paragraph (4) and not exceeding 5 years, and
“Substantially” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)
Cited by 1
(B) there is adequate security provided and reasonable interest paid on the unpaid amounts referred to in subparagraph (A).
“Reasonable” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)
For purposes of this paragraph, the term “total distribution” means the distribution within 1 taxable year to the recipient of the balance to the credit of the recipient’s account.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1174(c)(1)(A), added pars. (5) and (6).
(6) Payment requirement for installment distributions If an employer is required to repurchase employer securities as part of an installment distribution, the requirements of paragraph (1)(B) shall be treated as met if the amount to be paid for the employer securities is paid not later than 30 days after the exercise of the put option described in paragraph (4).
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1174(c)(1)(A), added pars. (5) and (6).
(7) Exception where employee elected diversification Paragraph (1)(A) shall not apply with respect to the portion of the participant’s account which the employee elected to have reinvested under section 401(a)(28)(B) or subparagraph (B) or (C) of section 401(a)(35).
Amended 1988, 2006
- 2006 Pub. L. 109-280 Pub. L. 109–280 inserted “or subparagraph (B) or (C) of section 401(a)(35)” before period at end.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(j)(5), added par. (7).
(i) Reimbursement for expenses of establishing and administering plan A plan which otherwise meets the requirements of this section shall not be treated as failing to meet such requirements merely because it provides that—
(1) Expenses of establishing plan As reimbursement for the expenses of establishing the plan, the employer may withhold from amounts due the plan for the taxable year for which the plan is established (or the plan may pay) so much of the amounts paid or incurred in connection with the establishment of the plan as does not exceed the sum of—
(A) 10 percent of the first $100,000 which the employer is required to transfer to the plan for that taxable year under section 41(c)(1)(B),1 and
Amended 1981, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(15)(A), (D), substituted “41” for “44G”, and struck out “48(n)(1) or” after “taxable year under section”.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 331(c)(1)(E), inserted reference to section 44G(c)(1)(B).
(B) 5 percent of any amount so required to be transferred in excess of the first $100,000; and
(2) Administrative expenses As reimbursement for the expenses of administering the plan, the employer may withhold from amounts due the plan (or the plan may pay) so much of the amounts paid or incurred during the taxable year as expenses of administering the plan as does not exceed the lesser of—
(A) the sum of—
(i) 10 percent of the first $100,000 of the dividends paid to the plan with respect to stock of the employer during the plan year ending with or within the employer’s taxable year, and
(ii) 5 percent of the amount of such dividends in excess of $100,000 or
(B) $100,000.
(j) Conditional contributions to the plan A plan which otherwise meets the requirements of this section shall not be treated as failing to satisfy such requirements (or as failing to satisfy the requirements of section 401(a) of this title or of section 403(c)(1) of the Employee Retirement Income Security Act of 1974) merely because of the return of a contribution (or a provision permitting such a return) if—
(1) the contribution to the plan is conditioned on a determination by the Secretary that such plan meets the requirements of this section,
Cited by 1
(2) the application for a determination described in paragraph (1) is filed with the Secretary not later than 90 days after the date on which an employee plan credit is claimed, and
Amended 1980
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(L)(iii)(V), substituted “employee plan credit” for “ESOP credit”.
(3) the contribution is returned within 1 year after the date on which the Secretary issues notice to the employer that such plan does not satisfy the requirements of this section.
(k) Requirements relating to certain withdrawals Notwithstanding any other law or rule of law—
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(15)(E), inserted provision requiring that, for purposes of this subsection, the reference to the matching employee plan credit refer to such credit as in effect before the enactment of the Tax Reform Act of 1984.
(1) the withdrawal from a plan which otherwise meets the requirements of this section by the employer of an amount contributed for purposes of the matching employee plan credit shall not be considered to make the benefits forfeitable, and
Amended 1980
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(L)(iii)(V), substituted “employee plan credit” for “ESOP credit”.
(2) the plan shall not, by reason of such withdrawal, fail to be for the exclusive benefit of participants or their beneficiaries,
if the withdrawn amounts were not matched by employee contributions or were in excess of the limitations of section 415. Any withdrawal described in the preceding sentence shall not be considered to violate the provisions of section 403(c)(1) of the Employee Retirement Income Security Act of 1974. For purposes of this subsection, the reference to the matching employee plan credit shall refer to such credit as in effect before the enactment of the Tax Reform Act of 1984.
(l) Employer securities defined For purposes of this section—
Cited by 12
(1) In general The term “employer securities” means common stock issued by the employer (or by a corporation which is a member of the same controlled group) which is readily tradable on an established securities market.
Cited by 3
(2) Special rule where there is no readily tradable common stock If there is no common stock which meets the requirements of paragraph (1), the term “employer securities” means common stock issued by the employer (or by a corporation which is a member of the same controlled group) having a combination of voting power and dividend rights equal to or in excess of—
(A) that class of common stock of the employer (or of any other such corporation) having the greatest voting power, and
(B) that class of common stock of the employer (or of any other such corporation) having the greatest dividend rights.
Amended 1980
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(J)(i), substituted “class of common stock” for “class of stock”.
Cited by 1
(3) Preferred stock may be issued in certain cases Noncallable preferred stock shall be treated as employer securities if such stock is convertible at any time into stock which meets the requirements of paragraph (1) or (2) (whichever is applicable) and if such conversion is at a conversion price which (as of the date of the acquisition by the tax credit employee stock ownership plan) is reasonable. For purposes of the preceding sentence, under regulations prescribed by the Secretary, preferred stock shall be treated as noncallable if after the call there will be a reasonable opportunity for a conversion which meets the requirements of the preceding sentence.
Amended 1980
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(J)(ii), (L)(ii)(II), substituted “as employer securities” for “as meeting the requirements of paragraph (1)”, “paragraph (1) or (2)” for “paragraph (2)”, and “tax credit employee stock ownership plan” for “ESOP” and inserted provisions requiring preferred stock to be treated as noncallable if after the call there will be a reasonable opportunity for a conversion which meets the requirements of the preceding sentence.
(4) Application to controlled group of corporations
Amended 1980, 1986, 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(k)(3), redesignated par. (4), relating to nonvoting common stock may be acquired in certain cases, as (5).
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1176(b), added par. (4) relating to acquisition of nonvoting common stock.
- 1980 Pub. L. 96-605 Pub. L. 96–605 substituted in heading “Application to controlled group of corporations” for “Controlled group of corporations defined” and in subpar. (B) heading “Where common parent owns at least” for “Common parent may own only” and added subpar. (C).
Cited by 2
(A) In general For purposes of this subsection, the term “controlled group of corporations” has the meaning given to such term by section 1563(a) (determined without regard to subsections (a)(4) and (e)(3)(C) of section 1563).
Cited by 2
(B) Where common parent owns at least 50 percent of first tier subsidiary For purposes of subparagraph (A), if the common parent owns directly stock possessing at least 50 percent of the voting power of all classes of stock and at least 50 percent of each class of nonvoting stock in a first tier subsidiary, such subsidiary (and all other corporations below it in the chain which would meet the 80 percent test of section 1563(a) if the first tier subsidiary were the common parent) shall be treated as includible corporations.
(C) Where common parent owns 100 percent of first tier subsidiary For purposes of subparagraph (A), if the common parent owns directly stock possessing all of the voting power of all classes of stock and all of the nonvoting stock, in a first tier subsidiary, and if the first tier subsidiary owns directly stock possessing at least 50 percent of the voting power of all classes of stock, and at least 50 percent of each class of nonvoting stock, in a second tier subsidiary of the common parent, such second tier subsidiary (and all other corporations below it in the chain which would meet the 80 percent test of section 1563(a) if the second tier subsidiary were the common parent) shall be treated as includible corporations.
(5) Nonvoting common stock may be acquired in certain cases Nonvoting common stock of an employer described in the second sentence of section 401(a)(22) shall be treated as employer securities if an employer has a class of nonvoting common stock outstanding and the specific shares that the plan acquires have been issued and outstanding for at least 24 months.
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(h)(1), substituted “the second sentence” for “the last sentence”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(k)(3), redesignated par. (4), relating to nonvoting common stock may be acquired in certain cases, as (5).
(m) Nonrecognition of gain or loss on contribution of employer securities to tax credit employee stock ownership plan No gain or loss shall be recognized to the taxpayer with respect to the transfer of employer securities to a tax credit employee stock ownership plan maintained by the taxpayer to the extent that such transfer is required under section 41(c)(1)(B),1 or subparagraph (A) or (B) of section 48(n)(1).1
Amended 1980, 1981, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(15)(A), substituted “41” for “44G”.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 331(c)(1)(F), inserted reference to section 44G(c)(1)(B).
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(D), (L)(i), substituted provisions relating to nonrecognition of gain or loss on contribution of employer securities to a tax credit employee stock ownership plan for provisions relating to contributions of stock of a controlling corporation.
(n) Securities received in certain transactions
Amended 1980, 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(a)(3)(A), added subsec. (n). Former subsec. (n) redesignated (o).
- 1980 Pub. L. 96-222 Pub. L. 96–222, § 101(a)(7)(L)(iii)(V), substituted “employee plan credit” for “ESOP credit” in pars. (1) and (2).
Cited by 5
(1) In general A plan to which section 1042 applies and an eligible worker-owned cooperative (within the meaning of section 1042(c)) shall provide that no portion of the assets of the plan or cooperative attributable to (or allocable in lieu of) employer securities acquired by the plan or cooperative in a sale to which section 1042 applies may accrue (or be allocated directly or indirectly under any plan of the employer meeting the requirements of section 401(a))—
Amended 1986, 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7304(a)(2)(A)(i), struck out “or section 2057” after “section 1042” in two places in introductory provisions.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(g)(1), made technical amendment to directory language of Pub. L. 99–514, § 1172(b)(1). See 1986 Amendment note below.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1172(b)(1), as amended by Pub. L. 100–647, § 1011B(g)(1), inserted “or section 2057” in two places in introductory provisions, “or any decedent if the executor of the estate of such decedent makes a qualified sale to which section 2057 applies,” in subpar. (A)(i), and “or the decedent” in subpar. (A)(ii).
Cited by 2
(A) during the nonallocation period, for the benefit of—
(i) any taxpayer who makes an election under section 1042(a) with respect to employer securities,
Amended 1989, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141 substituted “securities,” for “securities,,,”.
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7304(a)(2)(A)(ii), struck out “or any decedent if the executor of the estate of such decedent makes a qualified sale to which section 2057 applies” after “employer securities,”.
(ii) any individual who is related to the taxpayer (within the meaning of section 267(b)), or
Amended 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7304(a)(2)(A)(iii), struck out “or the decedent” after “the taxpayer”.
Cited by 1
(B) for the benefit of any other person who owns (after application of section 318(a)) more than 25 percent of—
Cited by 2
(i) any class of outstanding stock of the corporation which issued such employer securities or of any corporation which is a member of the same controlled group of corporations (within the meaning of subsection (l)(4)) as such corporation, or
(ii) the total value of any class of outstanding stock of any such corporation.
For purposes of subparagraph (B), section 318(a) shall be applied without regard to the employee trust exception in paragraph (2)(B)(i).
(2) Failure to meet requirements If a plan fails to meet the requirements of paragraph (1)—
Amended 1981
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 331(c)(1)(G), (H), inserted “or employee stock ownership credit” after “employee plan credit” in par. (2) and added par. (3).
(A) the plan shall be treated as having distributed to the person described in paragraph (1) the amount allocated to the account of such person in violation of paragraph (1) at the time of such allocation,
(B) the provisions of section 4979A shall apply, and
Cited by 1
(C) the statutory period for the assessment of any tax imposed by section 4979A shall not expire before the date which is 3 years from the later of—
(i) the 1st allocation of employer securities in connection with a sale to the plan to which section 1042 applies, or
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7304(a)(2)(B), struck out “or section 2057” after “section 1042”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(g)(2), inserted “or section 2057” after “which section 1042”.
(ii) the date on which the Secretary is notified of such failure.
(3) Definitions and special rules For purposes of this subsection—
Amended 1981, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(15)(A), substituted “41” for “44G”.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 331(c)(1)(G), (H), inserted “or employee stock ownership credit” after “employee plan credit” in par. (2) and added par. (3).
(A) Lineal descendants Paragraph (1)(A)(ii) shall not apply to any individual if—
(i) such individual is a lineal descendant of the taxpayer, and
(ii) the aggregate amount allocated to the benefit of all such lineal descendants during the nonallocation period does not exceed more than 5 percent of the employer securities (or amounts allocated in lieu thereof) held by the plan which are attributable to a sale to the plan by any person related to such descendants (within the meaning of section 267(c)(4)) in a transaction to which section 1042 applied.
Amended 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239, § 7304(a)(2)(B), struck out “or section 2057” after “section 1042”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(g)(2), inserted “or section 2057” after “which section 1042”.
(B) 25-percent shareholders A person shall be treated as failing to meet the stock ownership limitation under paragraph (1)(B) if such person fails such limitation—
(i) at any time during the 1-year period ending on the date of sale of qualified securities to the plan or cooperative, or
(ii) on the date as of which qualified securities are allocated to participants in the plan or cooperative.
(C) Nonallocation period The term “nonallocation period” means the period beginning on the date of the sale of the qualified securities and ending on the later of—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1018(t)(4)(C), amended subpar. (C) generally. Prior to amendment, subpar. (C) read as follows: “The term ‘nonallocation period’ means the 10-year period beginning on the later of—
“(i) the date of the sale of the qualified securities, or
“(ii) the date of the plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with such sale.”
(i) the date which is 10 years after the date of sale, or
(ii) the date of the plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with such sale.
(o) Distribution and payment requirements A plan meets the requirements of this subsection if—
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1174(b)(1), added subsec. (o). Former subsec. (o) redesignated (p).
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(a)(3)(A), redesignated former subsec. (n) as (o).
(1) Distribution requirement
(A) In general The plan provides that, if the participant and, if applicable pursuant to sections 401(a)(11) and 417, with the consent of the participant’s spouse elects, the distribution of the participant’s account balance in the plan will commence not later than 1 year after the close of the plan year—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(i)(3), substituted “if the participant and, if applicable pursuant to sections 401(a)(11) and 417, with the consent of the participant’s spouse elects” for “unless the participant otherwise elects”.
(i) in which the participant separates from service by reason of the attainment of normal retirement age under the plan, disability, or death, or
(ii) which is the 5th plan year following the plan year in which the participant otherwise separates from service, except that this clause shall not apply if the participant is reemployed by the employer before distribution is required to begin under this clause.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011B(i)(1), substituted “distribution is required to begin under this clause” for “such year”.
(B) Exception for certain financed securities For purposes of this subsection, the account balance of a participant shall not include any employer securities acquired with the proceeds of the loan described in section 404(a)(9) until the close of the plan year in which such loan is repaid in full.
(C) Limited distribution period The plan provides that, unless the participant elects otherwise, the distribution of the participant’s account balance will be in substantially equal periodic payments (not less frequently than annually) over a period not longer than the greater of—
Cited by 2
(i) 5 years, or
(ii) in the case of a participant with an account balance in excess of $800,000, 5 years plus 1 additional year (but not more than 5 additional years) for each $160,000 or fraction thereof by which such balance exceeds $800,000.
Amended 2002
- 2002 Pub. L. 107-147 Pub. L. 107–147 substituted “$800,000” for “$500,000” in two places and “$160,000” for “$100,000”.
(2) Cost-of-living adjustment The Secretary shall adjust the dollar amounts under paragraph (1)(C) at the same time and in the same manner as under section 415(d).
(p) Prohibited allocations of securities in an S corporation
Amended 1986, 2001
- 2001 Pub. L. 107-16 Pub. L. 107–16 added subsec. (p) and redesignated former subsec. (p) as (q).
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1174(b)(1), redesignated former subsec. (o) as (p).
Cited by 43
(1) In general An employee stock ownership plan holding employer securities consisting of stock in an S corporation shall provide that no portion of the assets of the plan attributable to (or allocable in lieu of) such employer securities may, during a nonallocation year, accrue (or be allocated directly or indirectly under any plan of the employer meeting the requirements of section 401(a)) for the benefit of any disqualified person.
Cited by 5
(2) Failure to meet requirements
(A) In general If a plan fails to meet the requirements of paragraph (1), the plan shall be treated as having distributed to any disqualified person the amount allocated to the account of such person in violation of paragraph (1) at the time of such allocation.
Cited by 1
(B) Cross reference For excise tax relating to violations of paragraph (1) and ownership of synthetic equity, see section 4979A.
(3) Nonallocation year For purposes of this subsection—
Cited by 4
(A) In general The term “nonallocation year” means any plan year of an employee stock ownership plan if, at any time during such plan year—
Cited by 1
(i) such plan holds employer securities consisting of stock in an S corporation, and
(ii) disqualified persons own at least 50 percent of the number of shares of stock in the S corporation.
(B) Attribution rules For purposes of subparagraph (A)—
(i) In general The rules of section 318(a) shall apply for purposes of determining ownership, except that—
(I) in applying paragraph (1) thereof, the members of an individual’s family shall include members of the family described in paragraph (4)(D), and
(II) paragraph (4) thereof shall not apply.
(ii) Deemed-owned shares Notwithstanding the employee trust exception in section 318(a)(2)(B)(i), an individual shall be treated as owning deemed-owned shares of the individual.
Solely for purposes of applying paragraph (5), this subparagraph shall be applied after the attribution rules of paragraph (5) have been applied.
(4) Disqualified person For purposes of this subsection—
Cited by 3
(A) In general The term “disqualified person” means any person if—
Cited by 1
(i) the aggregate number of deemed-owned shares of such person and the members of such person’s family is at least 20 percent of the number of deemed-owned shares of stock in the S corporation, or
Cited by 2
(ii) in the case of a person not described in clause (i), the number of deemed-owned shares of such person is at least 10 percent of the number of deemed-owned shares of stock in such corporation.
(B) Treatment of family members In the case of a disqualified person described in subparagraph (A)(i), any member of such person’s family with deemed-owned shares shall be treated as a disqualified person if not otherwise treated as a disqualified person under subparagraph (A).
(C) Deemed-owned shares
Cited by 2
(i) In general The term “deemed-owned shares” means, with respect to any person—
(I) the stock in the S corporation constituting employer securities of an employee stock ownership plan which is allocated to such person under the plan, and
(II) such person’s share of the stock in such corporation which is held by such plan but which is not allocated under the plan to participants.
Cited by 1
(ii) Person’s share of unallocated stock For purposes of clause (i)(II), a person’s share of unallocated S corporation stock held by such plan is the amount of the unallocated stock which would be allocated to such person if the unallocated stock were allocated to all participants in the same proportions as the most recent stock allocation under the plan.
(D) Member of family For purposes of this paragraph, the term “member of the family” means, with respect to any individual—
Cited by 1
(i) the spouse of the individual,
(ii) an ancestor or lineal descendant of the individual or the individual’s spouse,
Cited by 1
(iii) a brother or sister of the individual or the individual’s spouse and any lineal descendant of the brother or sister, and
Cited by 1
(iv) the spouse of any individual described in clause (ii) or (iii).
A spouse of an individual who is legally separated from such individual under a decree of divorce or separate maintenance shall not be treated as such individual’s spouse for purposes of this subparagraph.
(5) Treatment of synthetic equity For purposes of paragraphs (3) and (4), in the case of a person who owns synthetic equity in the S corporation, except to the extent provided in regulations, the shares of stock in such corporation on which such synthetic equity is based shall be treated as outstanding stock in such corporation and deemed-owned shares of such person if such treatment of synthetic equity of 1 or more such persons results in—
Cited by 1
(A) the treatment of any person as a disqualified person, or
(B) the treatment of any year as a nonallocation year.
For purposes of this paragraph, synthetic equity shall be treated as owned by a person in the same manner as stock is treated as owned by a person under the rules of paragraphs (2) and (3) of section 318(a). If, without regard to this paragraph, a person is treated as a disqualified person or a year is treated as a nonallocation year, this paragraph shall not be construed to result in the person or year not being so treated.
(6) Definitions For purposes of this subsection—
(A) Employee stock ownership plan The term “employee stock ownership plan” has the meaning given such term by section 4975(e)(7).
(B) Employer securities The term “employer security” has the meaning given such term by section 409(l).
(C) Synthetic equity The term “synthetic equity” means any stock option, warrant, restricted stock, deferred issuance stock right, or similar interest or right that gives the holder the right to acquire or receive stock of the S corporation in the future. Except to the extent provided in regulations, synthetic equity also includes a stock appreciation right, phantom stock unit, or similar right to a future cash payment based on the value of such stock or appreciation in such value.
Cited by 3
(7) Regulations and guidance
(A) In general The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection.
(B) Avoidance or evasion The Secretary may, by regulation or other guidance of general applicability, provide that a nonallocation year occurs in any case in which the principal purpose of the ownership structure of an S corporation constitutes an avoidance or evasion of this subsection.