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Retiring shares


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Interesting question arose from out in the wide world, and I don't know much about ESOP's. Suppose you have an S-corporation, where the document clearly states that all distributions must be in cash. Seems straightforward enough. So if the corporation RETIRES shares (as opposed to repurchasing them) when someone terminates employment, there's still no share distribution to the participant, right? So that no NUA calculation would apply, even if there is a lump sum distribution? Isn't the net effect (to the participant) the same, whether shares are retired or repurchased - i.e. the participant never receives ownership of the shares, so there is no "put" option, and the participant just receives cash, as required under the terms of the document?

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You can do share distributions of S Corp shares, if the plan allows but most likely prohibits you keeping the shares, and then the shares are bought by the company or plan.   You can get NUA treatment at that point.   The IRS has ruled this "1 second" ownership of the S Corp shares blows the S Corp election, creates too many shareholders....... 

 

I see it all the time.

In fact there are all these rules on how you adjust the cost basis of S Corp stock for the pass through income and how that will effect the NUA calculation.   My point being if you have to worry about cost like that it is because you can get NUA treatment if set up right. 

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If the document clearly states that all distributions must be in the form of cash, why is this distribution being paid in the form of stock?  You are correct, lump sum cash distributions are NOT eligible for NUA treatment, lump sum stock distributions ARE eligible for NUA treatment (regardless of whether the shares are retired by the company or repurchased by the ESOP's trust).  As ESOP Guy stated, S corporation stock cost basis is adjusted for income before the NUA calculation can be finalized.  But I think it is best to be clear on whether the distribution was in the form of stock or cash.  The participant would have signed something "putting" his shares back to either the company or the trust in order to receive payment for the shares.  Although the shares are only owned for "1 second," there would still be a put option by the participant.  If there is no put option, then it seems more likely this was a cash distribution. 

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Thank you both. But I'm trying to understand - ESOP, I get it that a S-corp CAN allow a stock distribution. I'm struggling with the concept, however, of how this is possible, even for "1 second" if the plan language clearly states that if the corporation is a S-corp, that distributions must be in cash? Even if the participant signed (incorrectly?) a "put" - isn't the put meaningless? What trumps what here?

 

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3 hours ago, Belgarath said:

Thank you both. But I'm trying to understand - ESOP, I get it that a S-corp CAN allow a stock distribution. I'm struggling with the concept, however, of how this is possible, even for "1 second" if the plan language clearly states that if the corporation is a S-corp, that distributions must be in cash? Even if the participant signed (incorrectly?) a "put" - isn't the put meaningless? What trumps what here?

 

Both of the people who answered made it clear the document has to allow a stock distribution.  This is qualified plan 101 and it applies to ESOP and other plans- you have to follow the plan document. 

 

So if the document requires cash distributions there isn't an NUA possibility. 

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