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ESOPs and Controlled Groups


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An ESOP owns 80% of 2 different corporations; ownership is as follows:

Company A:

80% ESOP
10% Individual 1
10% Individual 2

Company B:

80% ESOP
20% Individual 3

Based on the 80% ownership, is there a controlled group, or is the ownership interest by the ESOP disregarded for controlled group purposes?

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On ‎12‎/‎7‎/‎2020 at 6:45 PM, A Shot in the Dark said:

When calculating ownership attribution under code section 318 and 1563 stock held in an ESOP and any other qualified retirement plan is excluded from said calcs.

I'm not taking a position as to whether that is correct or not, but can you provide a cite for the 1563 analysis?

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On 12/7/2020 at 3:16 PM, JustMe said:

An ESOP owns 80% of 2 different corporations; ownership is as follows:

Company A:

80% ESOP
10% Individual 1
10% Individual 2

Company B:

80% ESOP
20% Individual 3

Based on the 80% ownership, is there a controlled group, or is the ownership interest by the ESOP disregarded for controlled group purposes?

Are you saying the same ESOP owns 80% of both companies?

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All, 

Thank you for your support. I was second guessing this response and planned on drafting a new response and then got side tracked. I do not agree that the ESOP ownership is disregarded and was going to look into this further.

Correct, the ESOP owns 80% of each company. I have asked if the relationship is a parent-subsidiary relationship and the underlying ownership breakdown of the ESOP in case I need to consider a brother-sister controlled group scenario.

@Bill Presson - am I barking up the right tree with my questions?

 

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I don't think you can have parent-sub, because the common owner is a trust, not a corporation.

As for brother sister, I don't necessarily think you would need to look through to the beneficiaries, because you have a trust owning 80% of each corporation. Boom. Except... 1563(c)(2) tells you that if 50% of the stock of an entity is owned by 5 or fewer individuals, estates, or trusts, stock owned by an employee benefit plan is "excluded stock" and you disregard it. So based on the statute (or my quick reading of it), you can argue either that because the ESOP owns 80% of each entity, its 80% is disregarded, so there is no CG, or you could argue that if the stock owned by the ESOP is not treated as stock under 1563, you cannot use its ownership to get to the 50% needed to get into 1563(c)(2) to disregard the stock. I think I looked at this 30 years ago and did not find an answer. Maybe there is guidance on it now. Or maybe I'm missing something in the statute. Anyway, this gives you something to think about for the analysis.

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Are you sure there's not a holding company between the ESOP and the two companies you mention as being 80% ESOP-owned?

In other words: (1) ESOP owns 100% of HoldCo, Inc.; (2) HoldCo, Inc. is the plan sponsor and its stock is used as the ESOP's employer securities; (3) HoldCo, Inc. in turn owns 80% of both Company A and Company B?

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3 hours ago, A Shot in the Dark said:

Treasury Regulation section 1.414c-3c(2) provides as follows:

An interest which is an interest in or stock of such organization held by an employees' trust described in section 401(a) which is exempt from tax under section 501(a) shall be excluded if such trust is for the benefit of the employees of such organization.

I get that, A Shot in the Dark. But what both the Code and regs are at least arguably saying is disregard the stock (if held by an exempt trust) if the 50% test is met by other shareholders, but how can you say the 50% is met here, if you disregard the 80% held by the ESOP, since then the other shareholders only have 20%? Also, I just have a hard time thinking that if one ESOP owns 2 corps, they're not in a controlled group, e.g. for nondiscrimination purposes. But maybe that would make sense, because then you would have a multiple employer plan, and unless the two corps are essentially the same business and only separated for formal reasons, e.g. licensing in different states, it would probably make sense to run as a multiple employer plan. But what would probably make even more sense in that situation would be to have a separate ESOP for each company. Interesting situation.

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