Question

To be eligible for the nonrecognition of gain treatment, which of the following is true?

1.) The ESOP must own at least 30% of the corporation's stock immediately after the sale.
2.) The seller of the stock must reinvest the proceeds from the sale in qualified securities within 12 months after the sale and hold those securities for at least three years.

a.) 2 only
b.) both 1 and 2
c.) 1 only
d.) neither 1 nor 2

Answer 1

Both conditions stating that the ESOP must own at least 30% of the corporation's stock after the sale and that the seller must reinvest in qualified securities within 12 months and hold them for three years must be met for nonrecognition of gain treatment.

Step-by-step explanation:

To be eligible for the nonrecognition of gain treatment, certain conditions must be met. The first condition is that the ESOP (Employee Stock Ownership Plan) must own at least 30% of the corporation's stock immediately after the sale. The second condition is that the seller of the stock must reinvest the proceeds from the sale in qualified securities within 12 months after the sale and hold those securities for at least three years.

Given these requirements, the correct answer is b) both 1 and 2. Both conditions are required for a seller to be eligible for the nonrecognition of gain treatment on the sale of stock to an ESOP.