PRIA, Government Policy, Made Personal

Summary

A 50% tax applies when employer stock or stock-like benefits are put into worker plans or owned in ways the tax code forbids. It covers four situations: forbidden allocations by an employee stock ownership plan (ESOP) or eligible worker-owned cooperative; an allocation tied to a special qualified-transfer rule; allocations that break the rules for employer securities in certain S‑corporation plans (or a defined “nonallocation year”); and when a disqualified person owns synthetic equity in a nonallocation year. A “prohibited allocation” means putting qualified stock from a 1042 sale into a plan or giving benefits in ways that break the 409(n) rules. The tax is paid by the employer or eligible worker-owned cooperative that made the required written statement for the first two kinds, and by the S corporation for the last two kinds. The tax equals 50% of the “amount involved”: for 409(p) violations it is the amount put into the person’s account; for synthetic equity it is the value of the shares behind the synthetic equity; for the first nonallocation year it is the total value of deemed-owned shares of all disqualified persons. The IRS has at least 3 years to assess the tax, measured from the later of the triggering allocation/ownership (or the first such allocation for the qualified-transfer case) or the date the Secretary is notified.

Title 26, §4979A

Internal Revenue Code, Source: USLM XML via OLRC

(a)Imposition of tax

If—

(1)there is a prohibited allocation of qualified securities by any employee stock ownership plan or eligible worker-owned cooperative,

(2)there is an allocation described in section 664(g)(5)(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

(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.

(b)Prohibited allocation

For purposes of this section, the term “prohibited allocation” means—

(1)any allocation of qualified securities acquired in a sale to which section 1042 applies which violates the provisions of section 409(n), and

(2)any benefit which accrues to any person in violation of the provisions of section 409(n).

(c)Liability for tax

The tax imposed by this section shall be paid—

(1)in the case of an allocation referred to in paragraph (1) or (2) of subsection (a), by—

(A)the employer sponsoring such plan, or

(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

(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.

(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— (1)

(2)the date on which the Secretary is notified of the allocation described in subsection (a)(2).

(e)Definitions and special rules

For purposes of this section

(1) Definitions

(2)Special rules relating to tax imposed by reason of paragraph (3) or (4) of subsection (a)

(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).

(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.

(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.

(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)

(ii)the date on which the Secretary is notified of such allocation or ownership.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2001—Subsec. (a). Pub. L. 107–16, § 656(c)(1), added pars. (3) and (4) and, in concluding provisions, substituted “there is hereby imposed a tax on such allocation or ownership equal to 50 percent of the amount involved.” for “there is hereby imposed a tax on such allocation equal to 50 percent of the amount involved.” Subsec. (c). Pub. L. 107–16, § 656(c)(2), amended heading and text of subsec. (c) generally. Prior to amendment, text read as follows: “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, § 656(c)(3), amended heading and text of subsec. (e) generally. Prior to amendment, text read as follows: “Terms used in this section have the same respective meaning as when used in section 4978.” 1997—Subsec. (a). Pub. L. 105–34, § 1530(c)(15), amended heading and text of subsec. (a) generally. Prior to amendment, text read as follows: “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, § 1530(c)(16), amended heading and text of subsec. (c) generally. Prior to amendment, text read as follows: “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).” Subsecs. (d), (e). Pub. L. 105–34, § 1530(c)(17), added subsec. (d) and redesignated former subsec. (d) as (e). 1996—Subsec. (c). Pub. L. 104–188 amended directory language of Pub. L. 101–239, § 7304(a)(2)(D)(ii). See 1989 Amendment note below. 1989—Subsec. (b)(1). Pub. L. 101–239, § 7304(a)(2)(D)(i), struck out “or section 2057” after “section 1042”. Subsec. (c). Pub. L. 101–239, § 7304(a)(2)(D)(ii), as amended by Pub. L. 104–188, struck out “or section 2057(d)” after “section 1042(b)(3)(B)” in concluding provisions. 1986—Subsec. (b)(1). Pub. L. 99–514, § 1172(b)(2)(A), inserted reference to section 2057. Subsec. (c). Pub. L. 99–514, § 1172(b)(2)(B), inserted reference to section 2057(d).

Statutory Notes and Related Subsidiaries

Effective Date

of 2001 AmendmentAmendment by Pub. L. 107–16 applicable to plan years beginning after Dec. 31, 2004, except that in the case of any employee stock ownership plan established after Mar. 14, 2001, or 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 this title is not in effect on such date, amendment applicable to plan years ending after Mar. 14, 2001, see section 656(d) of Pub. L. 107–16, set out as a note under section 409 of this title.

Effective Date

of 1997 AmendmentAmendment by Pub. L. 105–34 applicable to transfers made by trusts to, or for the use of, an employee stock ownership plan after Aug. 5, 1997, see section 1530(d) of Pub. L. 105–34, set out as a note under section 401 of this title.

Effective Date

of 1989 AmendmentAmendment 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 AmendmentAmendment 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

Pub. L. 99–514, title XVIII, § 1854(a)(9)(D), Oct. 22, 1986, 100 Stat. 2878, 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, 1989For provisions directing that if any

Amendments

made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 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.

§4979A Tax on Certain Prohibited Allocations of Qualified Securities

Summary

Title 26, §4979A

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Statutory Notes and Related Subsidiaries

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