Sign in to follow this  
Followers 0
Guest Bob Webb

Tax reporting upon ESOP redemptions by Company

8 posts in this topic

IRC 6045 "Returns of Brokers" imposes certain information reporting requirements upon "brokers" who are defined by the statute to be:

The term "broker" includes--

(A) a dealer,

(B) a barter exchange, and

© any other person who (for a consideration) regularly acts as a middleman with respect to property or services.

But the regulations, Treas. Reg 1.6045-1(a) include in the definition of broker the statement that "A broker includes ..... or a corporation that regularly redeems its own stock."

Beyond this, there is very little guidance from the IRS or otherwise as to what constitutes "regularly" - particularly in the context of private companies that offer liquidity via redemption/put right - either in the context of mandatory ESOP stock redemptions, or redemption of stock acquired by emplyees via options or purchase. Are 1-3 redemptions a year "regularly" - what about annual redemptions based upon the annual ESOP valuation? What is more relevant - the number of times redemption is available? the number of shareholders redeemed on each occasion? or simply is an annual "redemption/put" opportunity sufficient to constitute "regularly?"

I'd be interested in the view taken by others..particularly in light of the dramatically increased penalties for failure to file. (which can now be into 6 or 7 figures)

Further, if, as in many cases for smaller private companies outside the ESOP context, the redemption is not for cash but rather via a note that is payable over a period of time (usually with interest at the AFR).

In my view, this does not seem to be the type transaction envisioned by the term "broker," but in light of the increased penalties, reporting seems to be the prudent course of action (although that then raises the question of whether or not you report the full purchase price when the note is delivered, or report as and when principal payments are made (interest obviously has always been a reported item).

Share this post


Link to post
Share on other sites

Everyone I know regarding this issue says the safe answer is for the employer to issue a 1099-B if the employer is buying shares from people who are exercising their put option right under an ESOP.

This might be more answer then you want but here goes.

This means that if the ESOP distributed shares to X worth $10,000, and then Company Y bought thsoe shares for $10,000 the safest answer is the following (I am skipping the NUA issue to keep it simple):

The ESOP issues a 1099-R showing a gross distribution for $10,000. The company issues a 1099-B showing gross proceeds from a stock sale of $10,000.

The best trust companies that work regularly with ESOPs will tell you this is the way they want it done if they are the trustee of the ESOP. Then again they don't want to be sued and they are spending their client's money to issue all these 1099s to protect themselves.

I have never actually had anyone raise your specific issue. How many times, or times per year does one need to do this activity. So I have no specific knowledge as to how some of the people I have talked to over the years would answer your question.

But one of my opinions about many of these questions on this board is they are being over thought, or people are looking to rationalize a way out.

I would apply te KISS principle to most of these questions, Keep It Simple Stupid. To me the simple answer is if you are redeming shares every time someone is paid from the ESOP you are doing it on a regular basis. Issue the 1099-B from the company.

I have never been part of a stock buy for a note so I can not help you on that one.

Hope that helps.

Share this post


Link to post
Share on other sites
Everyone I know regarding this issue says the safe answer is for the employer to issue a 1099-B if the employer is buying shares from people who are exercising their put option right under an ESOP.

This might be more answer then you want but here goes.

This means that if the ESOP distributed shares to X worth $10,000, and then Company Y bought thsoe shares for $10,000 the safest answer is the following (I am skipping the NUA issue to keep it simple):

The ESOP issues a 1099-R showing a gross distribution for $10,000. The company issues a 1099-B showing gross proceeds from a stock sale of $10,000.

The best trust companies that work regularly with ESOPs will tell you this is the way they want it done if they are the trustee of the ESOP. Then again they don't want to be sued and they are spending their client's money to issue all these 1099s to protect themselves.

I have never actually had anyone raise your specific issue. How many times, or times per year does one need to do this activity. So I have no specific knowledge as to how some of the people I have talked to over the years would answer your question.

But one of my opinions about many of these questions on this board is they are being over thought, or people are looking to rationalize a way out.

I would apply te KISS principle to most of these questions, Keep It Simple Stupid. To me the simple answer is if you are redeming shares every time someone is paid from the ESOP you are doing it on a regular basis. Issue the 1099-B from the company.

I have never been part of a stock buy for a note so I can not help you on that one.

Hope that helps.

I agree that the whether the company is a "broker" is a question of facts and circumstances, but what about if the esop assumes the repurchase obligation? can you take the position that a 1099-b obligation never arises because the esop is not engaged in a "trade or business"?

Share this post


Link to post
Share on other sites

If the ESOP "assumes the repurchase obligation" then I take that to mean that distributions are paid in the form of cash, not stock. In this case the company is not redeeming the shares, and the 1099-B requirement would clearly not apply.

Share this post


Link to post
Share on other sites

Does the plan say the distributions are made in the form of shares and then the ESOP buys the shares back?

That would be a rare set of provisions.

More likely as Marcus says the shares never leave the trust so there is no share transaction to report. It is just a 1099-R.

Share this post


Link to post
Share on other sites

I agree with Mr. Piquet and Mr. Guy for distributions in cash that simply keep the shares in the ESOP.

What about case where the ESOP distributes shares, and the ESOP buys shares from shareholders, because of a Put option and/or as the company's preferred method of redeeming shares?

FWIW, I think this is still just a 1099-R unless the ESOP's buying of shares is not random. That is, if the ESOP can more or less expect to be buying shares from shareholders nearly every year, then I'd issue 1099-B's for the ESOP's stock buys.

And if you issue both 1099-R's and -B's, give the participants enough information so they aren't taxed twice on the same money (the distribution and the buy back).

Share this post


Link to post
Share on other sites

Not to beat this to death, but I think that an ESOP that distributes shares and then repurchases those shares would never issue a 1099-B. Again, 29 CFR 1.6045-1(a)(1) states "A broker includes an obligor that regularly issues and retires its own debt or a corporation that regularly redeems its own stock." I would argue that an ESOP trust that repurchases shares from a participant is not the same as a corporation redeeming its own stock. Therefore, I would only consider issuing a 1099-B in the very specific case ofan ESOP that distributes shares that are regularly redeemed by the Company.

As an aside, it's not unheard of for an ESOP trust to distribute shares in a lump sum and then repurchase those same shares – this would be done in order to secure net unrealized appreciation ("NUA") treatment for the participant. Refer to box 6 of the 1099-R, where the amount of NUA would be reported. (of course NUA treatment can also be accomplished by a lump-sum distribution in shares followed by a repurchase/redemption by the Company, which could require both a 1099-B and 1099-R)

Of course the whole issue is ridiculous - if it were up to me I'd never issue a 1099-B, as I'm sure mistakes are made on 1040's as a result. Common sense would dictate that ESOP-sponsoring companies that issue 1099-R's should never have to issue a 1099-B for the same transaction. It serves no purpose but to confuse. I've never heard of a single case where an employer was penalized for failing to issue 1099-B's in this situation. Even if the IRS stupidly attempted to assess such a penalty, perhaps the company could argue that these are not true "redemptions" but rather a very specific §409(h)(1)(B)"repurchase" transaction.

Edited by Marcus R Piquet

Share this post


Link to post
Share on other sites

Thank you, Marcus, for correcting my cover-your-assets approach. (We don't deal with redemptions by the ESOP. The company buys the distributed shares.)

I agree that the ESOP is not considered a broker in this case.

I also agree that for participants who can't or don't use NUA tax treatment (which in our case is essentially everyone), the 1099-B serves no purpose for distributions that are immediately redeemed and adds a lot of unnecessary 1040 form-filling-out.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now
Sign in to follow this  
Followers 0