ESOP Association Welcomes Clarification of ESOP Tax Provision in President Obama’s FY 2013 Budget

News from The ESOP Association

The following press release was sent out today by The ESOP Association. We wanted to share this news with readers here on the blog.

And, no, the irony of talking about divorce on Valentine’s Day was not lost on us.

 ESOP Association Welcomes Clarification of ESOP Tax Provision in President Obama’s FY 2013 Budget

February 14, 2012 (Washington, DC) – The ESOP Association welcomed a provision in the revenue section of President Obama’s FY 2013 Budget as an example of positive work by the Federal officials working in the IRS and the Office of Tax Policy of the Department of Treasury.

The proposal, set forth in summary table S-9, Mandatory and Receipt Proposals, page 224 of the “Budget of the United States Government, Fiscal Year 2013,” provides as a tax simplification measure to “clarify exception to recapture of unrecognized gain on sale of stock to an ESOP,” with no revenue impact.

“To explain,” said ESOP Association President, J. Michael Keeling, “the proposal clarifies an issue involving divorce, and since 1985, one of the most widely used tax provisions encouraging the spread of employee stock ownership, I.R.C. 1042.”

I.R.C. 1042 provides that the seller of qualified employer securities to an ESOP, that holds 30% of the privately-held company’s higher class of stock subsequent to the sale, the seller may defer payment of the capital gains tax on his/her proceeds from the sale, as long as he/she reinvests the proceeds in qualifying securities of another U.S. corporation. I.R.C. 1042 further provides, however, that if the seller disposes of his/her equities acquired from the proceeds from the sale to the ESOP, he/she will owe the capital gains tax based on the original value of the shares sold to the ESOP.

The President’s Budget notes in its explanation of the proposal ESOP law clarification that I.R.C. 1041 provides that, when pursuant to a divorce decree a spouse divorcing is given title to shares, he/she does not recognize gain and owe tax.

Currently, there is an issue of whether the I.R.C. 1042 recapture tax applies even if the shares were acquired because of a divorce decree. The clarification would be: No, the recapture tax of I.R.C. 1042 takes a backseat to the I.R.C. 1041 exclusion.

“While the ‘fix’ may not sound dramatic, it evidences the open-minded, objective implementation of our tax laws by those at Treasury and IRS tasked to be sure ESOPs comply with law,” said Keeling. “Sure, sometimes the ESOP community disagrees with the men and women of Treasury and IRS interpretation of ESOP law, but we know their interpretations are based on honest efforts to enforce laws passed by Congress, and not in some adversarial motive to ‘get’ ESOPs as ERISA plans.”

“So, in sum, this is a positive proposal clearing up a conundrum sometimes faced when a couple with 1042 stock unfortunately divorce,” stated Keeling.

The ESOP Association is the national trade association for companies with employee stock ownership plans (ESOPs) and the leading voice in America for employee ownership.  The core cause of The ESOP Association is the belief that employee ownership will improve American competitiveness, increase productivity through greater employee participation, and strengthen our free enterprise economy. More information: website – and blog –


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