Section 1042 election - what is it?

[Jesse]

I did not research and am just curious as to what is a section 1042 election to exclude the gain.

MFJ couple both work at Walmart, in 2008 they sold all of their Walmart stock purchased through the employee stock plan. In reviewing the return I see the preparer reported the stock sale on the Schedule D, and then took a section 1042 election to exclude the gain, can anyone give me the plain and simple of what a Section 1042 election is?

[BHoffman]

Here is the Treas Reg with a Q&A. Looks at first glance like sort of a 1031 exchange.

http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A%2C_Sec._1.1042-1T

[Jesse]

That doesn't look plain and simple!

Ha-ha....just kidding.

If the plan allows for the purchase of company stock at a discount, the stock is later sold while throughout the year more stock is purchased that doesn't seem to fit the description for gain exclusion under Section 1042, does it?

If a loss possible wash sale rules, but if sold at a gain I don't think it's excludable, or am I missing something?

[BHoffman]

I don't think this is a plain and simple thing Probably going to take some slogging through. You didn't have any other plans, right?

[Jesse]

I don't think this is a plain and simple thing Probably going to take some slogging through. You didn't have any other plans, right?

I think this was just an error by the 2008 preparer, and as far as the end result it would not make a difference, the income was low enough that even if the election was not elected the tax rate on the LTCG would have been 0%.

The couple had $10 to $25 per paycheck taken out to buy Walmart stock over the last five or so years and they "cashed it in" in 2008 to pay off some bills. It was a car dealership that prepared the tax return in order to get the RAL to purchase a vehicle for the couple. I thought maybe they knew something I didn't? Wouldn't be the first, wouldn't be the last!

[Koss]

Section 1042

I think you are correct that Section 1042 is not applicable to the scenario you described.

The link provided by BHoffman, says, in pertinent part, that:

Under section 1042, the term qualified securities means employer securities (as defined in section 409(l)) with respect to which each of the following requirements is satisfied:

(1) The employer securities were issued by a domestic corporation;

(2) for at least one year before and immediately after the sale, the domestic corporation that issued the employer securities (and each corporation that is a member of a controlled group of corporations with such corporation for purposes of section 409(l)) has no stock outstanding that is readily tradeable on an established market;

(3) as of the time of the sale, the employer securities have been held by the taxpayer for more than 1 year; and

(4) the employer securities 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, 422A, 423, or 424 applies [Emphasis supplied].

Wal-Mart is publicly traded.

One of the things that makes it so difficult to read the actual text of the tax code (or, in this case, a derivative text written by the IRS) is that there are so many nested parentheses.

Sometimes, by the time you reach the end of a sentence, you can't remember what the subject was.



BMK

[Jesse]

Sometimes, by the time you reach the end of a sentence, you can't remember what the subject was.


.....& I thought it was just me!