Sale to Foreign Company Does Not Disqualify Section 1042 Qualified Replacement Property

The Daimler Benz-Chrysler merger has prompted a number of questions about whether the acquisition of a U.S. corporation by a foreign corporation (or a merger of a U.S. and foreign corporation, as in this case) means that an investment that was qualified replacement property (QRP) under section 1042 of the Internal Revenue Code is still qualified. Under that section, owners of closely held companies can take the proceeds from the sale of stock to an employee stock ownership plan (ESOP) and indefinitely defer capital gains taxation by reinvesting such proceeds in QRP, defined as securities of domestic operating companies not receiving more than 25% of their income from passive investment. So what happens when an investor buys securities in a qualifying company that subsequently becomes foreign-controlled? There appears to be no restriction on the statute that would cause this to be a problem, assuming that the acquisition or merger is a stock-for-stock transaction. If it is for cash, however, then this would constitute a sale and would trigger taxes.