I.R.C. § 4978(a) Tax On Dispositions Of Securities To Which Section 1042 Applies Before Close Of Minimum
Holding Period —
If, during the 3-year period after the date on which the employee stock ownership
plan or eligible worker-owned cooperative acquired any qualified securities in a
sale to which section 1042 applied or acquired any
qualified employer securities in a qualified gratuitous transfer to which section
664(g) applied, such plan or cooperative disposes of any qualified securities and—-
I.R.C. § 4978(a)(1) —
the total number of shares held by such plan or cooperative after such disposition
is less than the total number of employer securities held immediately after such
sale, or
I.R.C. § 4978(a)(2) —
except to the extent provided in regulations, the value of qualified securities held
by such plan or cooperative after such disposition is less than 30 percent of the
total value of all employer securities as of such disposition
(60 percent of the total value of all employer securities as of such disposition
in the case of any qualified employer securities acquired in a qualified gratuitous
transfer to which section 664(g) applied),
there is hereby imposed a tax on the disposition equal to the amount determined under
subsection (b).
I.R.C. § 4978(b) Amount Of Tax
I.R.C. § 4978(b)(1) In General —
The amount of the tax imposed by subsection (a) shall be equal to 10 percent of
the amount realized on the disposition.
I.R.C. § 4978(b)(2) Limitation —
The amount realized taken into account under paragraph
(1) shall not exceed that portion allocable to qualified securities acquired in the
sale to which section 1042 applied or acquired in the qualified gratuitous transfer to which section 664(g) applied determined as if such securities were disposed of—-
I.R.C. § 4978(b)(2)(A) —
first from qualified securities to which section 1042
applied or to which section 664(g) applied acquired during the 3-year period ending on the date of the disposition,
beginning with the securities first so acquired, and
I.R.C. § 4978(b)(2)(B) —
then from any other employer securities.
If subsection (d) applies to a disposition, the disposition shall be treated as made
from employer securities in the opposite order of the preceding sentence.
I.R.C. § 4978(b)(3) Distributions To Employees —
The amount realized on any distribution to an employee for less than fair market
value shall be determined as if the qualified security had been sold to the employee
at fair market value.
I.R.C. § 4978(c) Liability For Payment Of Taxes —
The tax imposed by this subsection shall be paid by—-
I.R.C. § 4978(c)(1) —
the employer, or
I.R.C. § 4978(c)(2) —
the eligible worker-owned cooperative,
that made the written statement described in section 664(g)(1)(E) or in section
1042(b)(3) (as the case may be).
I.R.C. § 4978(d) Section Not To Apply To Certain Dispositions
I.R.C. § 4978(d)(1) Certain Distributions To Employees —
This section shall not apply with respect to any distribution of qualified securities
(or sale of such securities) which is made by reason of—-
I.R.C. § 4978(d)(1)(A) —
the death of the employee,
I.R.C. § 4978(d)(1)(B) —
the retirement of the employee after the employee has attained 591/2 years of age,
I.R.C. § 4978(d)(1)(C) —
the disability of the employee (within the meaning of section 72(m)(7)), or
I.R.C. § 4978(d)(1)(D) —
the separation of the employee from service for any period which results in a 1-year
break in service
(within the meaning of section 411(a)(6)(A)).
I.R.C. § 4978(d)(2) Certain Reorganizations —
In the case of any exchange of qualified securities in any reorganization described
in section 368(a)(1) for stock of another corporation, such exchange shall not be treated as a disposition
for purposes of this section.
I.R.C. § 4978(d)(3) Liquidation Of Corporation Into Cooperative —
In the case of any exchange of qualified securities pursuant to the liquidation
of the corporation issuing qualified securities into the eligible worker-owned cooperative
in a transaction which meets the requirements of section 332 (determined by substituting
“100 percent” for “80 percent” each place it appears in section 332(b)(1)), such exchange
shall not be treated as a disposition for purposes of this section.
I.R.C. § 4978(d)(4) Dispositions To Meet Diversification Requirements —
This section shall not apply to any disposition of qualified securities which is
required under section 401(a)(28).
I.R.C. § 4978(e) Definitions And Special Rules —
For purposes of this section—-
I.R.C. § 4978(e)(1) Employee Stock Ownership Plan —
The term “employee stock ownership plan” has the meaning given to such term by section
4975(e)(7).
I.R.C. § 4978(e)(2) Qualified Securities —
The term “qualified securities” has the meaning given to such term by section 1042(c)(1);
except that such section shall be applied without regard to subparagraph
(B) thereof for purposes of applying this section and section 4979A with respect to securities acquired in a qualified gratuitous transfer (as defined
in section 664(g)(1)).
I.R.C. § 4978(e)(3) Eligible Worker-Owned Cooperative —
The term “eligible worker-owned cooperative” has the meaning given to such term
by section 1042(c)(2).
I.R.C. § 4978(e)(5) Employer Securities —
The term “employer securities” has the meaning given to such term by section 409(l).
(Added Pub. L. 98-369, div. A, title V, Sec. 545(a), July 18, 1984, 98 Stat. 894, and amended Pub. L. 99-514, title XVIII, Sec. 1854(e), Oct. 22, 1986, 100 Stat. 2880; Pub., L. 100-203, title
X, Sec. 10413(b)(1), Dec. 22, 1987, 101 Stat. 1330-438; Pub. L. 100-647, title I, Sec. 1011B(j)(4), Nov. 10, 1988, 102 Stat. 3492; Pub. L. 101-239, title
VII, Sec. 7304(a)(2)(C)(ii), Dec. 19, 1989, 103 Stat. 2353; Pub. L. 104-188, title I, Sec. 1602(b)(4), Aug. 20, 1996, 110 Stat. 1755; Pub. L. 105-34, title XV, Sec. 1530, Aug. 5, 1997, 111 Stat 788; Pub. L. 108-311, title IV, Sec. 408(a)(23), Oct. 4, 2004, 118 Stat. 1166.)
BACKGROUND NOTES
AMENDMENTS
2004 - Subsec. (a)(2). Pub. L. 108-311, Sec. 408(a)(23), amended par. (2) by substituting “(60 percent” for “60 percent”.
1997 - Subsec. (a). Pub. L. 105-34, Sec. 1530(c)(11)(A), inserted “or acquired any qualified employer securities in a qualified gratuitous
transfer to which section 664(g) applied” after “section 1042 applied”.
Subsec. (a)(2). Pub. L. 105-34, Sec. 1530(c)(11)(B), inserted “60 percent of the total value of all employer securities as of such disposition
in the case of any qualified employer securities acquired in a qualified gratuitous
transfer to which section 664(g)
applied)” before the comma at the end of par. (2).
Subsec. (b)(2). Pub. L. 105-34, Sec. 1530(c)(12), inserted “or acquired in the qualified gratuitous transfer to which section 664(g)
applied” after
“section 1042 applied”; and inserted “or to which section 664(g) applied"
after “section 1042 applied” in subpar. (A).
Subsec. (c). Pub. L. 105-34, Sec. 1530(c)(13), amended subsec. (c) by substituting
“written statement described in section 664(g)(1)(E) or in section 1042(b)(3) (as
the case may be).” for “written statement described in section 1042(b)(3).”.
Subsec. (e)(2). Pub. L. 105-34, Sec. 1530(c)(14), inserted “; except that such section shall be applied without regard to subparagraph
(B) thereof for purposes of applying this section and section 4979A with respect to
securities acquired in a qualified gratuitous transfer (as described in section 664(g)(1))”
before the period.
1996 - Subsec. (b)(2). Pub. L. 104-188, Sec. 1602(b)(4), replaced subpar. (A) and all that followed with the above. Before amendment, it
read as follows:
“(A) first, from section 133 securities (as defined in section 4978B(e)(2)) acquired
during the 3-year period ending on the date of such disposition, beginning with the
securities first so acquired.
(B) second, from section 133 securities (as so defined) acquired before such 3-year
period unless such securities
(or proceeds from the disposition)
have been allocated to accounts of participants or beneficiaries.
(C) third, from qualified securities to which section 1042 applied acquired during
the 3-year period ending on the date of the disposition, beginning with the securities
first so acquired, and
(D) then from any other employer securities.
If subsection (d) or section 4978B(d) applies to a disposition, the disposition shall
be treated as made from employer securities in the opposite order of the preceding
sentence.”
1989 - Subsec. (b)(2). Pub. L. 101-239 substituted ‘determined as if such securities were disposed of - ‘, subpars. (A)
to (D), and concluding provision for ‘(determined as if such securities were disposed
of in the order described in section 4978A(e))’.
1988 - Subsec. (d)(4). Pub. L. 100-647 added par. (4).
1987 - Subsec. (b)(2). Pub. L. 100-203 substituted ‘(determined as if such securities were disposed of in the order described
in section 4978A(e))’ for ‘(determined as if such securities were disposed of before
any other securities)’.
1986 - Subsec. (a)(1). Pub. L. 99-514, Sec. 1854(e)(1), substituted ‘than’ for ‘then’.
Subsec. (b)(1). Pub. L. 99-514, Sec. 1854(e)(2), substituted ‘subsection (a)’
for ‘paragraph (1)’.
Subsec. (c). Pub. L. 99-514, Sec. 1854(e)(3), substituted ‘section 1042(b)(3)’
for ‘section 1042(a)(2)(B)’.
Subsec. (d)(1)(C). Pub. L. 99-514, Sec. 1854(e)(4), substituted ‘section 72(m)(7)’ for ‘section 72(m)(5)’.
Subsec. (d)(3). Pub. L. 99-514, Sec. 1854(e)(7), added par. (3).
Subsec. (e)(2). Pub. L. 99-514, Sec. 1854(e)(5), substituted ‘section 1042(c)(1)’
for ‘section 1042(b)(1)’.
Subsec. (e)(3). Pub. L. 99-514, Sec. 1854(e)(6), substituted ‘section 1042(c)(2)’
for ‘section 1042(b)(1)’.
EFFECTIVE DATE OF 2004 AMENDMENT
Amendment by Sec. 408(a)(23) of Pub. L. 108-311 applicable on the date of the enactment of this Act [Enacted: Oct. 4, 2004].
EFFECTIVE DATE OF 1997 AMENDMENTS
Amendments by Sec. 1530(c) of Pub. L. 105-34 applicable to transfers made by trusts to, or for the use of, an employee stock ownership
plan after the date of the enactment of this Act [enacted: Aug. 5, 1997].
EFFECTIVE DATE OF 1996 AMENDMENT
Amendment by Sec. 1602(b) of Pub. L. 104-188 effective generally for loans made after the date of the enactment of this Act [August
20, 1996]. Sec. 1602(c)(2) and (3) provided the following exceptions:
“(2) Refinancings.--The amendments made by this section shall not apply to loans made
after the date of the enactment of this Act [August 20, 1996] to refinance securities
acquisition loans (determined without regard to section 133(b)(1)(B) of the Internal Revenue Code of 1986, as in effect on the day before the date of the enactment of this Act [August
20, 1996]) made on or before such date or to refinance loans described in this paragraph
if--
(A) the refinancing loans meet the requirements of section 133 of such Code (as so
in effect),
(B) immediately after the refinancing the principal amount of the loan resulting from
the refinancing does not exceed the principal amount of the refinanced loan (immediately
before the refinancing), and
(C) the term of such refinancing loan does not extend beyond the last day of the term
of the original securities acquisition loan.
For purposes of this paragraph, the term “securities acquisition loan” includes a
loan from a corporation to an employee stock ownership plan described in section 133(b)(3)
of such Code (as so in effect).
(3) Exception.--Any loan made pursuant to a binding written contract in effect before
June 10, 1996, and at all times thereafter before such loan is made, shall be treated
for purposes of paragraphs (1) and (2) as a loan made on or before the date of the
enactment of this Act [August 20, 1996].”
EFFECTIVE DATE OF 1989 AMENDMENT
Amendment by Pub. L. 101-239 applicable to estates of decedents dying after Dec. 19, 1989, see section 7304(a)(3)
of Pub. L. 101-239, set out as a note under section 409 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by Pub. L. 100-647 effective, except as otherwise provided, as if included in the provision of the Tax
Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1987 AMENDMENT
Section 10413(c) of Pub. L. 100-203 provided that: ‘The amendments made by this section
(enacting section 4978A of this title and amending this section) shall apply to taxable
events (within the meaning of section 4978A(c) of the Internal Revenue Code of 1986) occurring after February 26, 1987.'
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 effective, except as otherwise provided, as if included in the provisions of the
Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99-514, set out as a note under section 48 of this title.
EFFECTIVE DATE
Section 545(c) of Pub. L. 98-369 provided that: ‘The amendments made by this section
(enacting this section) shall apply to taxable years beginning after the date of enactment
of this Act (July 18, 1984).’
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of
title XI (Sec. 1101-1147 and 1171-1177)
or title XVIII (Sec. 1800-1899A) of Pub. L. 99-514 require an amendment to any plan, such plan amendment shall not be required to be
made before the first plan year beginning on or after Jan. 1, 1989, see section 1140
of Pub. L. 99-514, as amended, set out as a note under section 401 of this title.
