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Last Updated: January 8, 2012

-STATUTE

(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) the 1st allocation of such securities in connection with a
      qualified gratuitous transfer (as defined in section 664(g)(1)),
      or
        (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
        Except as provided in paragraph (2), terms used in this section
      have the same respective meanings as when used in sections 409
      and 4978.
      (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) the allocation or ownership referred to in such
          paragraph giving rise to such tax, or
            (ii) the date on which the Secretary is notified of such
          allocation or ownership.

-SOURCE

(Added and amended Pub. L. 99-514, title XI, Sec. 1172(b)(2), title
    XVIII, Sec. 1854(a)(9)(A), Oct. 22, 1986, 100 Stat. 2514, 2877;
    Pub. L. 101-239, title VII, Sec. 7304(a)(2)(D), Dec. 19, 1989, 103
    Stat. 2353; Pub. L. 104-188, title I, Sec. 1704(t)(22), Aug. 20,
    1996, 110 Stat. 1888; Pub. L. 105-34, title XV, Sec. 1530(c)(15)-
    (17), Aug. 5, 1997, 111 Stat. 1079, 1080; Pub. L. 107-16, title
    VI, Sec. 656(c), June 7, 2001, 115 Stat. 134.)

-MISC1

AMENDMENTS                            
      2001 - Subsec. (a). Pub. L. 107-16, Sec. 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, Sec. 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, Sec. 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, Sec. 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, Sec. 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, Sec. 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, Sec. 7304(a)(2)(D)(ii). See 1989 Amendment note
    below.
      1989 - Subsec. (b)(1). Pub. L. 101-239, Sec. 7304(a)(2)(D)(i),
    struck out "or section 2057" after "section 1042".
      Subsec. (c). Pub. L. 101-239, Sec. 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, Sec. 1172(b)(2)(A),
    inserted reference to section 2057.
      Subsec. (c). Pub. L. 99-514, Sec. 1172(b)(2)(B), inserted
    reference to section 2057(d).

                     EFFECTIVE DATE OF 2001 AMENDMENT                 
      Amendment 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 AMENDMENT                 
      Amendment 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 AMENDMENT                 
      Amendment 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 AMENDMENT                 
      Amendment 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                          
      Section 1854(a)(9)(D) of Pub. L. 99-514 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, 1989        
      For provisions directing that if any amendments made by subtitle
    A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or
    title XVIII [Secs. 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.