Academic Finance Research and Insights

This particular Greek dilemma is what came to mind when I first encountered an ESOP. I observed that business owners who sold shares to an ESOP seemed, like Odysseus, to find themselves between a rock and a hard place. They could elect to pursue a 1042 exchange and bypass the Scylla of capital gains taxes, but in doing so they had to roll their sale proceeds into qualified replacement property. That path would likely lead to the Charybdis of Floating Rate Notes. These special ESOP bonds are the predominant 1042 exchange asset in the marketplace, a fact that belies their relative shortcomings as an investment asset. Just how unattractive floating rate notes are, and why they became the default 1042 rollover strategy among financial advisors, is the subject of this article. However, unlike Odysseus, business owners seeking to implement 1042 exchanges have more affordable and transparent paths to navigate between a rock and a hard place.