[Federal Register Volume 68, Number 132 (Thursday, July 10, 2003)]
[Proposed Rules]
[Pages 41087-41089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17088]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 68, No. 132 / Thursday, July 10, 2003 / 
Proposed Rules  

[[Page 41087]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-121122-03]
RIN 1545-BC11


Notarized Statements of Purchase Under Section 1042

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments to the temporary 
regulations relating to notarized statements of purchase under section 
1042 of the Internal Revenue Code of 1986. The proposed regulations 
would affect taxpayers making an election to defer the recognition of 
gain under section 1042 on the sale of stock to an employee stock 
ownership plan. The proposed regulations provide guidance on the 
notarization requirements of the temporary regulations.

DATES: Written and electronic comments and requests for a public 
hearing must be received by October 8, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG-121122-03), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (REG-121122-03), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically directly to the IRS Internet site at http://www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, John T. 
Ricotta at (202) 622-6060 (not a toll-free number); concerning 
submissions or hearing requests, Sonya Cruse, (202) 622-7180 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the requirement of 
Sec.  1.1042-1T, A-3(b) of the Temporary Income Tax regulations that a 
statement of purchase for qualified replacement property be notarized 
within 30 days of the date of purchase of the property (30-day 
notarization requirement).
    The temporary regulations under section 1042 were published in TD 
8073 on February 4, 1986 (EE-63-84) (51 FR 4312) as part of a package 
of temporary regulations addressing effective dates and other issues 
under the Tax Reform Act of 1984. The text of the temporary regulations 
also served as a notice of proposed rulemaking (EE-96-85) (51 FR 4391). 
A public hearing was held on June 26, 1986, concerning the proposed 
regulations.

Explanation of Provisions

Overview

    Section 1042(a) 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 employee stock ownership plan (ESOP) (as 
defined in section 4975(e)(7)) or eligible worker owned cooperative (as 
defined in section 1042(c)(2)) 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 requirements of 
section 1042(b) and Sec.  1.1042-1T of the Temporary Income Tax 
Regulations are satisfied.
    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 which 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 section 83, 422, or 423 applied.
    A sale of qualified securities meets the requirements of section 
1042(b) if: (1) The qualified securities are sold to an ESOP (as 
defined in section 4975(e)(7)), 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 sections 4978 and 4979A 
(which provide for excise taxes on certain dispositions or allocations 
of securities acquired in a sale to which section 1042 applies) with 
respect to such employer or cooperative; and (4) the taxpayer's holding 
period with respect to the qualified securities is at least three years 
(determined as of the time of the sale).
    The taxpayer must purchase qualified replacement property within 
the replacement period, which is defined in section 1042(c)(3) as the 
period which begins three months before the date on which the sale of 
qualified securities occurs and ends 12 months after the date of such 
sale.
    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)(C)) 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 1042(c)(4)(B) defines an operating corporation as a 
corporation more than 50 percent of the assets of which, at the time 
the security was purchased or before the close of the replacement 
period, were used in the active conduct of a trade or business.
    Section 1.1042-1T A-3(a) of the Temporary Income Tax Regulations 
states that the election is to be made in a statement of election 
attached to the taxpayer's income tax return filed on or before the due 
date (including extensions of time) for the taxable year in which the 
sale occurs.
    Section 1.1042-1T A-3(b) states that the statement of election must 
provide

[[Page 41088]]

that the taxpayer elects to treat the sale of securities as a sale of 
qualified securities under section 1042(a) and must 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 eligible worker-owned 
cooperative to which the qualified securities were sold; and (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, A-3(b) 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. The purpose of the statement of purchase is to 
identify qualified replacement property with respect to a sale of 
qualified securities. The qualified replacement property will have its 
cost basis reduced under section 1042(d) to reflect the gain on the 
sale of qualified securities that is being deferred by the taxpayer. 
Upon subsequent disposition of the qualified replacement property by 
the taxpayer, the deferred gain will be recognized by the taxpayer 
under section 1042(e). Under section 1042(f), the filing of the 
statement of purchase of qualified replacement property (or a statement 
of the taxpayer's intention not to purchase replacement property) will 
begin the statutory period for assessment of any deficiency with 
respect to gain arising from the sale of the qualified securities. The 
purpose of the 30-day notarization requirement is to provide a 
contemporaneous identification of replacement property.
    However, the 30-day notarization requirement leads to frequent 
mistakes by taxpayers and their advisors. Taxpayers are often unaware 
of this requirement and become aware of it only when they prepare their 
tax returns for the year of sale to the ESOP. By this time, the 30-day 
period is typically past because purchases of replacement property may 
have been made up to one year before. A number of private letter 
rulings have been issued granting relief to taxpayers in these 
situations as long as the statements were notarized shortly after the 
taxpayer became aware of the requirement and it was represented that 
the property listed was the only replacement property purchased for 
this sale.
    A number of commentators on the temporary and proposed regulations 
criticized this requirement as without statutory authority, a trap for 
the unwary, and inconsistent with the definition of the qualified 
replacement period in section 1042(c)(3).

Proposed Amendment to the Regulations

    In order to facilitate taxpayer compliance with the temporary 
regulations concerning identification of qualified replacement property 
through notarization of the statements of purchase, the proposed 
amendment to the temporary regulations would modify Sec.  1.1042-1T, A-
3(b) to provide that the notarization requirements for the statement of 
purchase are satisfied if the taxpayer's statement of purchase is 
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 was purchased after such filing date and 
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.

Proposed Effective Date

    The proposed amendments to the temporary regulations would apply to 
taxable years of sellers ending on or after the date of publication of 
the Treasury decision adopting these amendments as final regulations in 
the Federal Register. However, taxpayers may rely upon these proposed 
regulations for guidance with respect to all open taxable years pending 
the issuance of final regulations. If, and to the extent, future 
guidance is more restrictive than the guidance in these proposed 
regulations, the future guidance will be applied without retroactive 
effect.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, these 
proposed regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department request comments on the clarity of the 
proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these regulations is John T. Ricotta of the 
Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities). However, other personnel from the IRS and 
Treasury participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to The Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. In Sec.  1.1042-1T, A-3, in the undesignated paragraph 
following paragraph (b)(6), the penultimate

[[Page 41089]]

sentence is removed and three sentences added in its place to read as 
follows:


Sec.  1.1042-1T  Questions and Answers relating to the sales of stock 
to employee stock ownership plans or certain cooperatives (temporary).

* * * * *
    Q-3. * * *
    A-3. * * *
    (b) * * *
    (6) * * *
    * * * Such 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 previous two sentences apply to taxable years of 
sellers ending on or after [the date final regulations are published in 
the Federal Register]. * * *
* * * * *

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-17088 Filed 7-9-03; 8:45 am]
BILLING CODE 4830-01-P