(4) Qualified replacement property (A) In general The term “qualified replacement property” means any security issued by a domestic operating corporation which— (i) did not, for the taxable year preceding the taxable year in which such security was purchased, have passive investment income (as defined in section 1362(d)(3)(C)) in excess of 25 percent of the gross receipts of such corporation for such preceding taxable year, and (ii) is not the corporation which issued the qualified securities which such security is replacing or a member of the same controlled group of corporations (within the meaning of section 1563(a)(1) ) as such corporation. For purposes of clause (i), income which is described in section 954(c)(3) (as in effect immediately before the Tax Reform Act of 1986) shall not be treated as passive investment income. (B) Operating corporation For purposes of this paragraph— (i) In general The term “operating corporation” means a corporation more than 50 percent of the assets of which were, at the time the security was purchased or before the close of the replacement period, used in the active conduct of the trade or business. (ii) Financial institutions and insurance companies The term “operating corporation” shall include— (I) any financial institution described in section 581, and (II) an insurance company subject to tax under subchapter L. (C) Controlling and controlled corporations treated as 1 corporation (i) In general For purposes of applying this paragraph, if— (I) the corporation issuing the security owns stock representing control of 1 or more other corporations, (II) 1 or more other corporations own stock representing control of the corporation issuing the security, or (III) both, then all such corporations shall be treated as 1 corporation. (ii) Control For purposes of clause (i), the term “control” has the meaning given such term by section 304(c). In determining control, there shall be disregarded any qualified replacement property of the taxpayer with respect to the section 1042 sale being tested. (D) Security defined For purposes of this paragraph, the term “security” has the meaning given such term by section 165(g)(2), except that such term shall not include any security issued by a government or political subdivision thereof.


26 USC § 1042(c)(4)

Scoping language

For purposes of this paragraph
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