What is a '1042 rollover ESOP transaction'?

[Diane]

I have a client who is telling me about this transaction and asking questions about the basis of the stock. I have no idea what this is. Does anyone?

Diane

[kcjenkins]

http://www.esopservices.com/faqs.html

http://dept.kent.edu/oeoc/OEOClibrary/Coop1042Rollover.htm

"The Prohibited Allocation Rule Under Section 1042"

The prohibited allocation rule applies only when an ESOP has purchased employer securities from a shareholder who has satisfied the requirements for a Section 1042 rollover. Consequently, when there is only one selling shareholder, the shareholder and any related parties can fully participate in the ESOP if the shareholder does not make the Section 1042 rollover. However, if there are multiple selling shareholders, the situation can become more complicated if even one of them makes the Section 1042 rollover. The more-than-25% shareholder rule (discussed below) can prevent even a shareholder who does not make the election from receiving ESOP allocations attributable to the Section 1042 shares.

What happens if a selling shareholder attempts to make the Section 1042 rollover, but fails, for example, where the 30% ESOP ownership requirement of Section 1042 is not met or where the shareholder fails to make a timely 1042 election? The prohibited allocation rule is applicable by its terms only to assets “acquired by the plan . . . in a sale to which section 1042 applies.”3 If Section 1042 does not apply because of a failure to meet its requirements, the prohibited allocation rule will not apply either. If the Section 1042 rollover is partly effective and partly ineffective, the prohibited allocation rule will still apply, because Section 1042 would still be partly applicable.

[Diane]

Thank you KC.

I'll have to do more reading using your links. I am so unfamiliar with this. Apparently it happend in the year 2000 and he is now contributing the stock to a charity. So, I will have to do more reading to try and understand his questions.

Thank you again.

Diane

[Diane]

Need more info.

Client donated this stock. Since he took the Average Stock Value on the day of sale, is it subject to the 30% limit?