ESOP Section 1042 Question

[Guest svatty]

If an ESOP purchases shares of company stock (and after the sale would own more than 30% of the total outstanding stock of the company) and the selling shareholders elect Section 1042 treatment is there any problem with, say more than a year later, the company entering into additional financing and other corporate reorganization which afterwards results in the ESOP owning less than 30%? Basically I am concerned with how any issues this may raise for the company and/or the selling shareholders if such percentage of ownership drops below 30%. Thanks for any thoughts you may have ...

[RLL]

Hi svatty ---

It may be a problem for the sellers if the financing/reorganization was "pre-arranged" at the time of the 1042 sale of stock to the ESOP. In addition, if the financing/reorganization involves the ESOP's disposing of shares, there could be an excise tax imposed on the company under IRC section 4978.