When alternative structures to sell a closely held corporation are under consideration, a sale of stock to an employee stock ownership plan (ESOP) may offer tax benefits to the seller. Among those benefits is that a selling shareholder may, under IRC section 1042, avoid the recognition of gain by purchasing, within a specified period, “qualified replacement property” (QRP)—in general, securities issued by a domestic operating corporation.
If the stock sold constitutes “qualifying securities,” the cost of the QRP is not less than the amount realized from the sale, and certain other requirements are met, no gain will be generally recognized upon the sale, but the tax basis of the QRP will be reduced by the gain not recognized. During the years at issue in Berman v. Commissioner (163 T.C. No. 1 (2024)), the case discussed below, one of the requirements for qualifying securities was that the stock sold be shares of a domestic C corporation; this requirement will be somewhat relaxed for sales after 2027.