SCS Administration (ESOP)

Employee Benifits ESOP

Seller Financed ESOP Technique

This transaction allows a company's shareholder(s) to sell his or her stock without paying any capital gains on the sale. Under Section 1042 of the Internal Revenue Code, a shareholder can realize a tax deferred (possibly tax free) sale of his stock if he purchases with the proceeds of the sale bonds or stocks of a domestic corporation, which is known as Qualified Replacement Property (QRP). As long as the seller does not sell the stocks or bonds, he pays no taxes. The below technique enables a shareholder to sells his stock to the ESOP in exchange for payment through a note from the ESOP. As company tax-deductible contributions are deposited into the ESOP, the ESOP pays the seller and the seller receives the principal note payments tax-free, along with interest payments. Within one year of the date of the note, the seller borrows approximately 90% of the value of the stock being sold to purchase the QRP with money received from the ESOP and the borrowed funds, thus qualifying under the tax deferred (possibly tax free) transaction of Section 1042.


  1. Shareholder sells his stock to the ESOP in exchange for a note from the ESOP to the seller.
  2. Company makes tax-deductible contributions up to 25% of annual payroll for principal payments, plus interest payments to pay shareholder's note.
  3. Shareholder receives from the ESOP tax-free principal payments, and interest from the note.
  4. Shareholder borrows from lending institution approximately 90% of the value of the stock he or she is selling.
  5. With the money borrowed, and some of the money received from the ESOP, the shareholder purchases the QRP.

For more information about SCS Administration and our services,
Please call at 858-272-8973 or e-mail us at

Back to - ESOP Seller Financing