Bloomberg Bloomberg
Comprehensive Tax Research. Practitioner to Practitioner. ®

Internal Revenue Code, § 4979A. Tax On Certain Prohibited Allocations Of Qualified Securities

I.R.C. § 4979A(a) Imposition Of Tax
If—-
I.R.C. § 4979A(a)(1)
there is a prohibited allocation of qualified securities by any employee stock ownership plan or eligible worker-owned cooperative,
I.R.C. § 4979A(a)(2)
there is an allocation described in section 664(g)(5)(A),
I.R.C. § 4979A(a)(3)
there is any allocation of employer securities which violates the provisions of section 409(p), or a nonallocation year described in subsection (e)(2)(C) with respect to an employee stock ownership plan, or
I.R.C. § 4979A(a)(4)
any synthetic equity is owned by a disqualified person in any nonallocation year,
there is hereby imposed a tax on such allocation or ownership equal to 50 percent of the amount involved.
I.R.C. § 4979A(b) Prohibited Allocation
For purposes of this section, the term “prohibited allocation” means—-
I.R.C. § 4979A(b)(1)
any allocation of qualified securities acquired in a sale to which section 1042 applies which violates the provisions of section 409(n), and
I.R.C. § 4979A(b)(2)
any benefit which accrues to any person in violation of the provisions of section 409(n).
I.R.C. § 4979A(c) Liability For Tax
The tax imposed by this section shall be paid—-
I.R.C. § 4979A(c)(1)
in the case of an allocation referred to in paragraph (1) or (2) of subsection (a), by—-
I.R.C. § 4979A(c)(1)(A)
the employer sponsoring such plan, or
I.R.C. § 4979A(c)(1)(B)
the eligible worker-owned cooperative,
which made the written statement described in section 664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may be), and
I.R.C. § 4979A(c)(2)
in the case of an allocation or ownership referred to in paragraph (3) or (4) of subsection (a), by the S corporation the stock in which was so allocated or owned.
I.R.C. § 4979A(d) Special Statute Of Limitations For Tax Attributable To Certain Allocations
The statutory period for the assessment of any tax imposed by this section on an allocation described in subsection (a)(2) of qualified employer securities shall not expire before the date which is 3 years from the later of–-
I.R.C. § 4979A(d)(1)
the 1st allocation of such securities in connection with a qualified gratuitous transfer (as defined in section 664(g)(1)), or
I.R.C. § 4979A(d)(2)
the date on which the Secretary is notified of the allocation described in subsection (a)(2).
I.R.C. § 4979A(e) Definitions And Special Rules
For purposes of this section—-
I.R.C. § 4979A(e)(1) Definitions
Except as provided in paragraph (2), terms used in this section have the same respective meanings as when used in sections 409 and 4978.
I.R.C. § 4979A(e)(2) Special Rules Relating To Tax Imposed By Reason Of Paragraph (3) Or (4) Of Subsection (a)
I.R.C. § 4979A(e)(2)(A) Prohibited Allocations
The amount involved with respect to any tax imposed by reason of subsection (a)(3) is the amount allocated to the account of any person in violation of section 409(p)(1).
I.R.C. § 4979A(e)(2)(B) Synthetic Equity
The amount involved with respect to any tax imposed by reason of subsection (a)(4) is the value of the shares on which the synthetic equity is based.
I.R.C. § 4979A(e)(2)(C) Special Rule During First Nonallocation Year
For purposes of subparagraph (A), the amount involved for the first nonallocation year of any employee stock ownership plan shall be determined by taking into account the total value of all the deemed-owned shares of all disqualified persons with respect to such plan.
I.R.C. § 4979A(e)(2)(D) Statute Of Limitations
The statutory period for the assessment of any tax imposed by this section by reason of paragraph (3) or (4) of subsection (a) shall not expire before the date which is 3 years from the later of—-
I.R.C. § 4979A(e)(2)(D)(i)
the allocation or ownership referred to in such paragraph giving rise to such tax, or
I.R.C. § 4979A(e)(2)(D)(ii)
the date on which the Secretary is notified of such allocation or ownership.
(Added and amended Pub. L. 99-514, title XI, Sec. 1172(b)(2), title XVIII, Sec. 1854(a)(9)(A), Oct. 22, 1986, 100 Stat. 2514, 2877; Pub. L. 101-239, title VII, Sec. 7304(a)(2)(D), Dec. 19, 1989, 103 Stat. 2353; Pub. L. 105-34, title XV, Sec. 1530, Aug. 5, 1997, 111 Stat 788; Pub. L. 107-16, title VI, Sec. 656, June 7, 2001, 115 Stat. 38.)
BACKGROUND NOTES
AMENDMENTS
2001 - Subsec. (a). Pub. L. 107-16, Sec. 656(c)(1), amended subsec. (a) by striking “or” at the end of par. (1), by striking the following language after par. (2): “there is hereby imposed a tax on such allocation equal to 50 percent of the amount involved.”, and inserting the language above.
Subsec. (c). Pub. L. 107-16, Sec. 656(c)(2), amended subsec. (c). Before amendment it read as follows:
“(c) Liability for Tax.-
“The tax imposed by this section shall be paid by--
“(1) the employer sponsoring such plan, or
“(2) the eligible worker-owned cooperative, which made the written statement described in section 664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may be).”
Subsec. (e). Pub. L. 107-16, Sec. 656(c)(3), amended subsec. (e). Before amendment it read as follows:
“(e) Definitions
“Terms used in this section have the same respective meaning as when used in section 4978.”
1997 - Subsec. (a). Pub. L. 105-34, Sec. 1530(c)(15), amended subsec. (a). Prior to amendment it read as follows:
“(a) Imposition of tax
If there is a prohibited allocation of qualified securities by any employee stock ownership plan or eligible worker-owned cooperative, there is hereby imposed a tax on such allocation equal to 50 percent of the amount involved.”
Subsec. (c). Pub. L. 105-34, Sec. 1530(c)(16), amended subsec. (c). Prior to amendment it read as follows:
“(c) Liability for tax
“The tax imposed by this section shall be paid by--
“(1) the employer sponsoring such plan, or
“(2) the eligible worker-owned cooperative, which made the written statement described in section 1042(b)(3)(B).”
Subsec. (d). Pub. L. 105-34, Sec. 1530(c)(17), redesignated subsec. (d) as subsec. (e) and added a new subsec. (d).
1989 - Subsec. (b)(1). Pub. L. 101-239, Sec. 7304(a)(2)(D)(i), struck out ‘or section 2057’ after ‘section 1042’.
Subsec. (c). Pub. L. 101-239, Sec. 7304(a)(2)(D)(ii), as amended by Pub. L. 104-188, Sec. 1704(t)(22), struck out ‘or section 2057(d)’after ‘section 1042(b)(3)(B)’.
1986 - Subsec. (b)(1). Pub. L. 99-514, Sec. 1172(b)(2)(A), inserted reference to section 2057.
Subsec. (c). Pub. L. 99-514, Sec. 1172(b)(2)(B), inserted reference to section 2057(d).
EFFECTIVE DATE OF 2001 AMENDMENTS
Amendments by Sec. 656(c) of Pub. L. 107-16 applicable to plan years beginning after December 31, 2004. Sec. 656(d) of Pub. L. 107-16 provided the following exception:
“(2) EXCEPTION FOR CERTAIN PLANS.--In the case of any--
“(A) employee stock ownership plan established after March 14, 2001, or
“(B) employee stock ownership plan established on or before such date if employer securities held by the plan consist of stock in a corporation with respect to which an election under section 1362(a) of the Internal Revenue Code of 1986 is not in effect on such date,
“the amendments made by this section shall apply to plan years ending after March 14, 2001.”
Section 901 (Sunset of Provisions of Act) of Pub. L. 107-16, as amended by Pub. L. 107-358, provided that:
“(a) IN GENERAL.--All provisions of, and amendments made by, this Act shall not apply--
“(1) to taxable, plan, or limitation years beginning after December 31, 2010, or
“(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.
“(b) APPLICATION OF CERTAIN LAWS.--The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.
“(c) EXCEPTION.-Subsection (a) shall not apply to section 803 (relating to no federal income tax on restitution received by victims of the Nazi regime or their heirs or estates).”
PENSIONS AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS OF ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 MADE PERMANENT
Section 811 of Pub. L. 109-280 provided that:
“Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall not apply to the provisions of, and amendments made by, subtitles A through F of title VI of such Act (relating to pension and individual retirement arrangement provisions).”
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 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 1986 AMENDMENT
Amendment by section 1172(b)(2) of Pub. L. 99-514 applicable to sales after Oct. 22, 1986, with respect to which election is made by executor of an estate who is required to file the return of the tax imposed by this title on a date (including extensions) after Oct. 22, 1986, see section 1172(c) of Pub. L. 99-514, set out as a note under section 409 of this title.
EFFECTIVE DATE
Section 1854(a)(9)(D) of Pub. L. 99-514 provided that: ‘The amendments made by this paragraph (enacting this section and amending section 1042 of this title) shall apply to sales of securities after the date of the enactment of this Act (Oct. 22, 1986).’
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.