IRS written determination 201435014

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201435014
Release Date: 8/29/2014
Index Number: 1042.01-00
------------------------------------------------------------
---------------
---------------------
----------------------------
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---------------------------------------------------
Telephone Number:
----------------------
Refer Reply To:
CC:TEGE:EB:QP2
PLR-148103-13
Date:
May 22, 2014
Company=---------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Taxpayer A= ------------------------------
Taxpayer B=--------------------------
ESOP=---------------------------------------------------------------------------------
X shares=--------------------
Firm C=-------------------------
Firm D =------------------------------------------------
Individual E=-------------------
Amount X=------------------
Amount Y=------------------
Amount Z=----------------------
Year 1=-------
Year 2=-------
Date 1=---------------------------

PLR 148103-13
2
Date 2= ----------------------------
Date 3=----------------------
Date 4=----------------------------
Date 5=---------------------------
Date 6=-----------------
Date 7=--------------------
Date 8=------------------------
Date 9=-----------------------
Date 10=---------------------------

Dear ---------------------------------:
This letter responds to your request, submitted on your behalf by your authorized
representative, for a ruling that you have substantially complied with the requirements of
section 1042 of the Internal Revenue Code (Code) and the applicable regulations in
connection with a sale of stock of the Company to the employee stock ownership plan
(ESOP) maintained by the Company.
The following facts and representations have been submitted under penalty of perjury in
support of the ruling requested.
Taxpayers A and B are husband and wife. Their filing status for their U.S. Individual
Income Tax Return is “married filing jointly.”
The Company was a domestic C corporation at the time of the sale to the ESOP, and
never had any stock outstanding that was readily tradable on an established securities
market. The Company established an ESOP that is intended to be qualified under
section 401(a) of the Code and to meet the requirements of section 4975(e)(7).
On Date 1, Taxpayer A sold X shares of Company common stock to the ESOP for
Amount X. As a result of the sale, Taxpayer A realized a gain of Amount Y. At the time
of the sale, Taxpayer A had held the common stock for more than 3 years. Taxpayer A
did not receive the stock in a distribution from a plan described in section 401(a) of the
Code, or in a transfer pursuant to an option or other right to acquire stock to which

PLR 148103-13
3
sections 83, 422 or 423 applied. After the transaction, the ESOP owned 99.9% of the
total value of the outstanding stock of the Company, and Taxpayer A owned 0.1%.
Taxpayer A represents that he intended to defer recognition of the gain on the sale to
the ESOP under section 1042 of the Code. Taxpayers A and B relied on their
accounting firm, Firm C, to advise them on the requirements for making the section
1042 election, and to prepare their U.S. Individual Income Tax Return for Year 1, the
year of the sale to the ESOP. Taxpayer A informed Firm C of his intention to make an
election under section 1042, but Firm C failed to attach the section 1042 election
statement to Taxpayer A and B’s return, or to advise Taxpayers A and B that the return
was incomplete without the required statements. Taxpayers A and B filed the return on
Date 2. After Date 2, but before the extended due date for the return, Firm C realized
its error. Thus, pursuant to section 301.9100-2 of the Procedure and Administration
Regulations, on Date3 Taxpayers A and B filed an amended U.S. Individual Income
Tax Return for Year 1. The amended return included the election under section 1042
and a statement executed by the Company pursuant to section 1042(b), whereby the
Company agreed to be bound by the terms of sections 4978 and 4979A.
On various dates between Date 4 and Date 5 in Year 2, Taxpayer A invested a portion
of the proceeds from the sale to the ESOP in qualified replacement property, as defined
in section 1042(c)(4) of the Code. The total cost of the qualified replacement property
was Amount Z. One of the dates of purchase (Date 4) occurred before the section 1042
election was filed with the taxpayer’s amended return on Date 3; the other purchases
occurred after Date 3. Firm C did not notify the taxpayers that they were required to
attach a statement of purchase for the qualified replacement property bought at the time
of the section 1042 election to the election statement filed with their tax return.
Taxpayers A and B represent that they were dissatisfied with Firm C’s service, in
particular with Firm C’s failure to attach the section 1042 election statement to their
original return for Year 1. On Date 6, the taxpayers decided to retain Firm D to prepare
their income tax return for Year 2. Also on Date 6, Taxpayer A informed Firm D of the
election he had filed under section 1042, and of the qualified replacement property that
he had purchased. Taxpayer A relied on Firm D’s advice for completing the remaining
requirements for the section 1042 election.
On Date 7, based on the advice of Firm D, Taxpayer A executed notarized statements
of purchase for all of the qualified replacement property he had purchased. Also on
Date 7, Company’s Chief Financial Officer emailed the notarized statements of
purchase to Individual E at Firm D.
Firm D prepared Taxpayers A and B’s return for Year 2, but failed to attach the
notarized statements of purchase, or to advise Taxpayers A and B that the return was
incomplete without the statements of purchase. As a result, none of the statements of
purchase were attached to the return that Taxpayers A and B filed on or about Date 8,

PLR 148103-13
4
the extended due date for the return. Taxpayers A and B were unaware of this failure
until Date 9, when they and Firm D were reviewing year-end tax planning strategies.
After discovering the error, on Date 10 Taxpayers A and B submitted this ruling request
along with an amended return for Year 2 that included the notarized statements of
purchase.
You have requested a ruling that, based on the specific facts of this case, Taxpayers A
and B will be treated as having substantially complied with the requirements for an
election for the nonrecognition of gain under section 1042 of the Code, and that the
election will be treatedas having satisfied the requirements of section 1.1042-1T of the
Temporary Income Tax Regulations.
Section 1042(a) of the Code provides that a taxpayer or executor may elect in certain
cases not to recognize long-term capital gain on the sale of “qualified securities” to an
ESOP (as defined in section 4975(e)(7)) or eligible worker-owned cooperative if the
taxpayer purchases “qualified replacement property” (as defined in section 1042(c)(4))
within the replacement period of section 1042(c)(3), and the sale satisfies the
requirements of section 1042(b).
A sale of “qualified securities” meets the requirements of section 1042(b) if: (1) the
qualified securities are sold to an ESOP or an eligible worker owned cooperative; (2) the
plan or cooperative owns (after application of section 318(a)(4)), immediately after the
sale, at least 30 percent of - a) each class of outstanding stock of the corporation (other
than stock described in section 1504(a)(4)) which issued the securities, or (b) the total
value of all outstanding stock of the corporation (other than stock described in section
1504(a)(4)); (3) the taxpayer files with the Secretary a verified written statement of the
employer whose employees are covered by the ESOP or an authorized officer of the
cooperative consenting to the application of section 4978 and 4979A with respect to
such employer or cooperative; and (4) the taxpayer's holding period with respect to the
qualified securities is at least 3 years (determined as of the time of the sale).
Section 1042(c)(1) provides that the term “qualified securities” means employer
securities (as defined in section 409(l)) which are issued by a domestic C corporation
that has no stock outstanding that is readily tradable on an established securities
market; and were not received by the taxpayer in a distribution from a plan described in
section 401(a), or in a transfer pursuant to an option or other right to acquire stock to
which sections 83, 422 or 423 applied.
The taxpayer must purchase “qualified replacement property” within the “replacement
period” which is defined in section 1042(c)(3) as the period which begins 3 months
before the date on which the sale of qualified securities occurs and ends 12 months
after the date of such sale.

PLR 148103-13
5
Section 1042(c)(4)(A) defines “qualified replacement property” as any security issued by
a domestic operating corporation which 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)(D)) in excess of 25 percent of the gross receipts of
such corporation for such preceding taxable year; and is not the corporation which
issued the qualified securities which such security is replacing or a member of the same
controlled group of corporations (within the meaning of section 1563(a)(1)) as such
corporation.
Section 1.1042-1T (Q&A-3) of the Temporary Income Tax Regulations states that the
election shall be made in a “statement of election” attached to the taxpayer's income tax
return filedon or before the due date (including extensions of time) for the taxable year
in which the sale occurs.
Section 1.1042-1T (Q&A-3) states further that the “statement of election” shall provide
that the taxpayer elects to treat the sale of securities as a sale of qualified securities
under section 1042(a), and shall contain the following information:
(1) A description of the qualified securities sold, including the type and number of
shares;
(2) The date of the sale of the qualified securities;
(3) The adjusted basis of the qualified securities;
(4) The amount realized upon the sale of the qualified securities;
(5) The identity of the ESOP or worker-owned cooperative to which the qualified
securities were sold;
(6) If the sale was part of a single interrelated transaction under a prearranged
agreement between taxpayers involving other sales of qualified securities, the names
and taxpayer identification numbers of the other taxpayers under the agreement and the
number of shares sold by the other taxpayers.
Section 1.1042-1T (Q&A-3) further provides that if the taxpayer has purchased qualified
replacement property at the time of the election, the taxpayer must attach as part of the
statement of election a “statement of purchase” describing the qualified replacement
property, the date of the purchase, and the cost of the property, and declaring such
property to be qualified replacement property with respect to the sale of qualified
securities. The statement of purchase must be notarized no later than 30 days after the
purchase. If the taxpayer has not purchased qualified replacement property at the time
of the filing of the statement of election, a timely election under this Q&A shall not be
considered to have been made unless the taxpayer attaches the notarized statement of

PLR 148103-13
6
purchase described above to the taxpayer's income tax return filed for the taxable year
following the year for which the election under section 1042(a) was made.
Proposed section 1.1042-1T (Q&A-3) of the Temporary Income Tax Regulations
provides that the statement of purchase must be notarized not later than the time the
taxpayer files the income tax return for the taxable year in which the sale of qualified
securities occurred in any case in which any qualified replacement property was
purchased by such time and during the qualified replacement period. If qualified
replacement property is purchased after such filing date but during the qualified
replacement period, the statement of purchase must be notarized not later than the time
the taxpayer’s income tax return is filed for the taxable year following the year for which
the election under section 1042(a) was made. The Notice of Proposed Rulemaking,
issued on July 10, 2003, provides that taxpayers may rely on the proposed regulations
for all open years.
Sections 301.9100-1, 301.9100-2, and 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner will use to determine whether to
grant an extension of time to make a regulatory election. Sections 301.9100-1 and
301.9100-2 also provide an automatic extension of time to make certain statutory
elections. Section 301.9100-1(b) of the regulations defines a regulatory election as an
election whose due date is prescribed by a regulation published in the Federal Register
or a revenue ruling, revenue procedure, notice, or announcement published in the
Internal Revenue Bulletin. Section 301.9100-1(b) defines a statutory election as an
election whose due date is prescribed by statute.
Section 301.9100-2(b) provides that an automatic extension of 6 months from the due
date of a return (excluding extensions) is granted to make a statutory election whose
due date is the due date of the return or the due date of the return including extensions
provided that the taxpayer timely filed its return for the year the election should have
been made and the taxpayer takes “corrective action” as defined in paragraph (c) of this
section within the 6 month period.
Section 301.9100-2(c) provides that “corrective action” means taking the steps required
to file the election in accordance with the statute or the regulation published in the
Federal Register. For those elections required to be filed with a return, corrective action
includes filing an original or an amended return for the year the statutory election should
have been made and attaching the appropriate form for or statement for making the
election. Taxpayers who make an election under an automatic extension (and all
taxpayers whose tax liability would be affected by the election) must file their return in a
manner that is consistent with the election and comply with all other requirements for
making the election for the year the election should have been made and for all affected
years; otherwise, the IRS may invalidate the election.

PLR 148103-13
7
“Substantial compliance with regulatory requirements may suffice when such
requirements are procedural and when the essential statutory purposes have been
fulfilled.” Young v. Commissioner, 783 F.3d 1201, 1205 (5
th
Cir. 1986) (quoting
American Air Filter Co. v. Commissioner, 81 T.C. 709, 719 (1983)).
Filing the statement of election is an essential requirement of section 1042. SeeEstate
of Clause v. Commissioner, 122 T.C. 115, 122 (2004) (“As the plain language of section
1042 indicates, the ‘essence’ of the statute is to demand evidence of a binding election
to accept the tax consequences imposed by the section.”).
With respect to the filing of Taxpayer A’s election statement, because the deadline for
making a section 1042 election is set by section 1042(c)(6) of the Code (as the due
date, including extensions, of the taxpayer's return for the year of the sale), section
1042(a) is a statutory election. Accordingly, section 301.9100-2(b) of the Procedure
and Administration Regulations provides an automatic extension of 6 months from the
due date of the return for the year in which the sale to the ESOP was made in order to
make a section 1042 election, provided that the taxpayers' return was timely filed for the
year the election should have been made and the taxpayers take corrective action as
defined in section 301.9100-2(c) within the 6-month period. In the present case,
Taxpayers A and B's tax return for the year of the sale to the ESOP was filed before the
due date set forth in section 1042(c)(6), and corrective action within the meaning of
section 301.9100-2(c) was taken by Taxpayers A and B before 6 months from such due
date.
Taxpayers A and B thus timely filed the election statement with their Year 1 return. With
respect to the remaining requirements for making the section 1042 election, the
taxpayers purchased qualified replacement property, within the meaning of section
1042(c)(4), with a value of Amount Z before the end of the replacement period under
section 1042(c)(3). They represent that the sale to the ESOP met the requirements of
section 1042(b). Taxpayers A and B relied on the advice of tax professionals, Firm C
and Firm D, concerning the requirements necessary to complete the section 1042
election in a timely and correct manner. Based on the advice of Firm D, Taxpayer A
executed notarized statements of purchase for the qualified replacement property and
submitted the statements to Firm D. Upon discovering Firm D’s failure to attach the
statements to the Year 2 return, Taxpayers A and B filed an amended return for Year 2
with the statements of purchase attached and submitted this ruling request.
Therefore, based on the specific facts of this case and representations made by
Taxpayers A and B, and provided that the ESOP was qualified under section 401(a) of
the Code and met the requirements of section 4975(e)(7) at the time of the sale, we
conclude that Taxpayers A and B have substantially complied with the requirements for
an election under section 1042, and that the election will be treated as satisfying the
requirements of section 1042 and of section 1.1042-1T of the Temporary Income Tax
Regulations.

PLR 148103-13
8
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.
This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that this ruling may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to the taxpayer’s representative.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.
Sincerely,
John T. Ricotta
Branch Chief, Qualified Plans Branch 2 (Employee
Benefits)
(Tax Exempt & Government Entities)
Enclosure
Copy for purposes of section 6110