Merger of ESOP and 401(k) Plan Can Satisfy 30% Ownership Threshold for ESOPs

In Private Letter Ruling 9639071, for release on September 23, 1996, the IRS ruled that the employer stock owned in a 401(k) plan that is merged into an ESOP will count towards the total amount of stock owned by the ESOP for purposes of meeting the 30% threshold to qualify for section 1042 treatment. Section 1042 allows sellers to ESOPs in closely held firms to take a tax deferral on reinvestments of their gains if the ESOP owns 30% or more of the company and certain other requirements are met.