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Abstract
Almost 25 years ago, the Internal Revenue Service (IRS) issued Private Letter Ruling 9102017, which closed the door on "partial rollovers" in sales of qualifying employer securities to an employee stock ownership plan (ESOP). Selling shareholders and their advisors should be cautioned that, because of the private letter ruling, if the seller has basis in shares sold to an ESOP, some of that basis may be "trapped" in the qualified replacement property and will not be available to offset gain recognized where a 100 percent tax-deferred transaction is not desired or not possible. The seller may pay capital gains sooner and on a larger portion of the sales price than he or she may have anticipated when planning for a partial rollover transaction. In this article, the author will describe Internal Revenue Code Section 1042 rollovers, explain the potential "basis trapping" effect of the IRS position on partial rollovers, and offer suggestions to prepare your client for the possibility of a higher-than-anticipated transaction tax cost.