(a) Tax on dispositions of securities to which section 1042 applies before close of minimum holding period If, 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
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(e)(1), substituted “than” for “then”.
(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),
“Except to the extent provided in regulations” leaves this to Treasury. No regulation cites this provision (eCFR, Oct 19, 2026)
Amended 1997, 2004
- 2004 Pub. L. 108-311 Pub. L. 108–311 substituted “(60 percent” for “60 percent”.
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1530(c)(11)(B), inserted before comma at end “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).
Amended 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1530(c)(11)(A), inserted “or acquired any qualified employer securities in a qualified gratuitous transfer to which section 664(g) applied” after “section 1042 applied” in introductory provisions.
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(b) Amount of tax
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(1) In general The amount of the tax imposed by subsection (a) shall be equal to 10 percent of the amount realized on the disposition.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(e)(2), substituted “subsection (a)” for “paragraph (1)”.
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(2) Limitation The 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—
Amended 1987, 1989, 1996, 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1530(c)(12)(A), inserted “or acquired in the qualified gratuitous transfer to which section 664(g) applied” after “section 1042 applied” in introductory provisions.
- 1996 Pub. L. 104-188 Pub. L. 104–188 added subpars. (A) and (B) and closing provisions and struck out former subpars. (A) to (D) and closing provisions which read as follows:
“(A) first, from section 133 securities (as defined in section 4978B(e)(2)) acquired during the 3-year period ending on the date of such disposition, beginning with the securities first so acquired.
“(B) second, from section 133 securities (as so defined) acquired before such 3-year period unless such securities (or proceeds from the disposition) have been allocated to accounts of participants or beneficiaries.
“(C) third, from qualified securities to which section 1042 applied acquired during the 3-year period ending on the date of the disposition, beginning with the securities first so acquired, and
“(D) then from any other employer securities.
If subsection (d) or section 4978B(d) applies to a disposition, the disposition shall be treated as made from employer securities in the opposite order of the preceding sentence.”
- 1989 Pub. L. 101-239 Pub. L. 101–239 substituted “determined as if such securities were disposed of—”, subpars. (A) to (D), and concluding provision for “(determined as if such securities were disposed of in the order described in section 4978A(e))”.
- 1987 Pub. L. 100-203 Pub. L. 100–203 substituted “(determined as if such securities were disposed of in the order described in section 4978A(e))” for “(determined as if such securities were disposed of before any other securities)”.
(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
Amended 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1530(c)(12)(B), inserted “or to which section 664(g) applied” after “section 1042 applied”.
(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 employees The 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 taxes The tax imposed by this subsection shall be paid by—
Amended 1986, 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1530(c)(13), substituted “written statement described in section 664(g)(1)(E) or in section 1042(b)(3) (as the case may be)” for “written statement described in section 1042(b)(3)”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(e)(3), substituted “section 1042(b)(3)” for “section 1042(a)(2)(B)”.
(1) the employer, or
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
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(1) Certain distributions to employees This 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,
(B) the retirement of the employee after the employee has attained 59½ years of age,
(C) the disability of the employee (within the meaning of section 72(m)(7)), or
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(e)(4), substituted “section 72(m)(7)” for “section 72(m)(5)”.
(D) the separation of the employee from service for any period which results in a 1-year break in service (within the meaning of section 411(a)(6)(A)). needs § 411(a)(6)(A)
“Regulations prescribed by the Secretary” leaves this to Treasury. Cited by Reg. § 1.411(b)(5)-1(d)(2)(ii)(C), Reg. § 54.4978-1T(c)(4)
(2) Certain reorganizations In the case of any exchange of qualified securities in any reorganization described in section 368(a)(1) for stock of another corporation, such exchange shall not be treated as a disposition for purposes of this section.
(3) Liquidation of corporation into cooperative In the case of any exchange of qualified securities pursuant to the liquidation of the corporation issuing qualified securities into the eligible worker-owned cooperative in a transaction which meets the requirements of section 332 (determined by substituting “100 percent” for “80 percent” each place it appears in section 332(b)(1)), such exchange shall not be treated as a disposition for purposes of this section.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(e)(7), added par. (3).
(4) Dispositions to meet diversification requirements This section shall not apply to any disposition of qualified securities which is required under section 401(a)(28).
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647 added par. (4).
(e) Definitions and special rules For purposes of this section—
(1) Employee stock ownership plan The term “employee stock ownership plan” has the meaning given to such term by section 4975(e)(7).
(2) Qualified securities The term “qualified securities” has the meaning given to such term by section 1042(c)(1); except that such section shall be applied without regard to subparagraph (B) thereof for purposes of applying this section and section 4979A with respect to securities acquired in a qualified gratuitous transfer (as defined in section 664(g)(1)).
Amended 1986, 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34, § 1530(c)(14), inserted before period at end “; except that such section shall be applied without regard to subparagraph (B) thereof for purposes of applying this section and section 4979A with respect to securities acquired in a qualified gratuitous transfer (as defined in section 664(g)(1))”.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(e)(5), substituted “section 1042(c)(1)” for “section 1042(b)(1)”.
(3) Eligible worker-owned cooperative The term “eligible worker-owned cooperative” has the meaning given to such term by section 1042(c)(2).
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1854(e)(6), substituted “section 1042(c)(2)” for “section 1042(b)(1)”.
(4) Disposition The term “disposition” includes any distribution.
(5) Employer securities The term “employer securities” has the meaning given to such term by section 409(l).