This question is about an employee stock ownership plan. The plans sponsor (which also is and was the employer of the plans participants) elected, and intends to maintain, Federal income tax treatment as an S corporation. The employer securities are not publicly traded.
The plan provides: Whenever the Sponsor has a Subchapter S election in effect, the portion of a Retirement Distribution that is attributable to Employer Securities shall be paid in cash or, in the Administrators Discretion, shall be delivered in the Corporations Shares but subject to the Distributees obligation immediately to sell the Shares to the Corporation at the Fair Market Value set as of the most recent Valuation Date that precedes the Distribution. (The provision seems consistent with Internal Revenue Code § 409(h), and the plan has a recent IRS determination letter.)
The plans trustee annually has used an independent appraiser, and always has used the valuation reports per-share amount as the value for the plans transactions.
The appraiser set the value as of December 31, 2014 at $0.00. (The corporations debt was much more than any valuation of the corporations assets.) The plans trustee believes the year-end value for 2015 also will be zero.
For a set of upcoming distributions to participants who severed from employment in 2014 and earlier, the plans administrator is thinking of informing the participants that a notional delivery of the shares and the sale of them for $0.00 per share is treated as having happened simultaneously.
Can there really be a sale that extinguishes a property right in exchange for an imaginary payment of $0.00?
If, instead, the plans administrator decides that the distribution shall be paid in cash, can there really be a payment if the amount paid is $0.00?
Should the plans fiduciaries be worried that a participant now surrenders property, gets nothing for it, and forever loses the opportunity for the property to increase in value?
