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409(p) -- Are these people still owners?


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We have an owner that is selling his shares to the ESOP, but the shares will be voted under a "voting trust" where the trustee votes based on the selling owner's interests (the selling owner is the beneficiary of the voting trust).  As the shares are paid off, the voting trust stops applying to the paid-off shares.

Is the selling owner still considered an owner for purposes of 409(p) testing.  The selling owner doesn't participate in the ESOP, but is relatives with someone who does and whether or not the selling owner is still considered an owner could have a big effect on the test.

Thank you!

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If the shares are not otherwise synthetic equity, I think the only relevance of the voting rights is to the "facts and circumstances" analysis of whether the purpose of the arrangement is to avoid 409(p). See 1.409(p)-1T(g)(2). My guess is that if the ESOP got all of the shares' economics and shares are released from the "voting trust" as the loan is repaid that this would be viewed as a security mechanism and be OK. I have seen this in another deal but have not had to fight with IRS about it.

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