§ 1042. Sales of stock to employee stock ownership plans or certain cooperatives
(a)
Nonrecognition of gain
If—
(1)
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,
then the gain (if any) on such sale which would be recognized as long-term capital gain shall be recognized only to the extent that the amount realized on such sale exceeds the cost to the taxpayer of such qualified replacement property.
(b)
Requirements to qualify for nonrecognition
A sale of qualified securities meets the requirements of this subsection if—
(2)
Plan must hold 30 percent of stock after sale
The plan or cooperative referred to in paragraph (1) owns (after application of section
318
(a)(4)), immediately after the sale, at least 30 percent of—
(c)
Definitions; special rules
For purposes of this section—
(1)
Qualified securities
(A)
are issued by a domestic C corporation that has no stock outstanding that is readily tradable on an established securities market, and
(2)
Eligible worker-owned cooperative
The term “eligible worker-owned cooperative” means any organization—
(3)
Replacement period
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.
(4)
Qualified replacement property
(A)
In general
The term “qualified replacement property” means any security issued by a domestic operating corporation which—
(i)
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
(B)
Operating corporation
For purposes of this paragraph—
(i)
In general
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.
(C)
Controlling and controlled corporations treated as 1 corporation
(i)
In general
For purposes of applying this paragraph, if—
(I)
the corporation issuing the security owns stock representing control of 1 or more other corporations,
(II)
1 or more other corporations own stock representing control of the corporation issuing the security, or
then all such corporations shall be treated as 1 corporation.
(5)
Securities sold by underwriter
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).
(d)
Basis of qualified replacement property
The basis of the taxpayer in qualified replacement property purchased by the taxpayer during the replacement period shall be reduced by the amount of gain not recognized by reason of such purchase and the application of subsection (a). If more than one item of qualified replacement property is purchased, the basis of each of such items shall be reduced by an amount determined by multiplying the total gain not recognized by reason of such purchase and the application of subsection (a) by a fraction—
Any reduction in basis under this subsection shall not be taken into account for purposes of section
1278
(a)(2)(A)(ii) (relating to definition of market discount).
(e)
Recapture of gain on disposition of qualified replacement property
(1)
In general
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.
(2)
Special rule for corporations controlled by the taxpayer
If—
(A)
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
(B)
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,
then the taxpayer shall be treated as having disposed of such qualified replacement property at such time.
(3)
Recapture not to apply in certain cases
Paragraph (1) shall not apply to any transfer of qualified replacement property—
(A)
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,
(f)
Statute of limitations
If any gain is realized by the taxpayer on the sale or exchange of any qualified securities and there is in effect an election under subsection (a) with respect to such gain, then—
(1)
the statutory period for the assessment of any deficiency with respect to such gain shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of—
(A)
the taxpayer’s cost of purchasing qualified replacement property which the taxpayer claims results in nonrecognition of any part of such gain,
(g)
Application of section to sales of stock in agricultural refiners and processors to eligible farm cooperatives
(1)
In general
This section shall apply to the sale of stock of a qualified refiner or processor to an eligible farmers’ cooperative.
(2)
Qualified refiner or processor
For purposes of this subsection, the term “qualified refiner or processor” means a domestic corporation—
(A)
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
(B)
which, during the 1-year period ending on the date of the sale, purchases more than one-half of such products to be refined or processed from—
(3)
Eligible farmers’ 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.
(4)
Special rules
In applying this section to a sale to which paragraph (1) applies—
(A)
the eligible farmers’ cooperative shall be treated in the same manner as a cooperative described in subsection (b)(1)(B),
(B)
subsection (b)(2) shall be applied by substituting “100 percent” for “30 percent” each place it appears,