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Employer Stock in a Rabbi Trust


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This question concerns Notice 2000-56. I am setting up a rabbi trust for employees of a subsidiary corporation that intends to invest in stock of the parent corporation. Is it necessary for the rabbi trust assets to be subject to the claims of creditors of the parent and the subsidiary. If so, why? I was hoping that read Tom Brisendine's 5 page explanation in BNA would help clarify the issue - it did not. Any thoughts or guidance is appreciated. Thanks.:confused:

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Guest Remysis

Not sure if this old explanation I ran across will help:

Last year, [actually 2000] the IRS issued new regulations under the general corporate tax rules governing transactions in company stock among the parent and subsidiaries of a controlled group. While the corporate tax rules generally provide that a corporation’s transactions in its own stock will not give rise to taxable gains, these new regulations describe instances in which a subsidiary engaging in exchanges of stock of its parent corporation will recognize taxable gain. In general, a subsidiary will recognize gain on disposition of stock of its parent corporation, unless the subsidiary disposes of the parent corporation stock immediately after it has acquired stock from the parent corporation. If the subsidiary does not dispose of the parent corporation stock immediately after it has acquired -- or is considered to have acquired -- the stock from the parent, the subsidiary must recognize taxable gain on any appreciation in the stock since its acquisition from the parent.

These new rules have important implications for rabbi trusts that hold stock in a parent corporation and this stock is used to satisfy benefit obligations to employees of a subsidiary. In general, where the stock is to be used to satisfy an obligation to an employee of the subsidiary --and therefore, in the eyes of the IRS, satisfying an obligation of the subsidiary -- the IRS views the transfer of parent stock to the rabbi trust as a transfer from the parent to the subsidiary. This stock, now considered “acquired” by the subsidiary, typically is not disposed of immediately, but generally only when the employee is paid out in the future. The subsidiary may therefore be required to recognize taxable gain on any appreciation in the stock between the time of the transfer to the rabbi trust and the subsequent disposition.

In a notice late last year, the IRS described how a corporation may avoid these potentially undesirable tax consequences for its rabbi trust. In Notice 2000-56, the IRS stated that it will not view parent company stock as transferred to a subsidiary until the rabbi trust actually disposes of the stock, as long as, (1) the trust document provides that the stock of the parent corporation (along with other trust assets) remains subject to the claims and creditors of the parent, as well as the subsidiary, and (2) the stock and any assets remaining on the termination of the trust revert to the parent company. If this is the case, the IRS will view the parent corporation as continuing to own the parent company stock upon transfer to the rabbi trust until it is disposed of in the future. Existing rabbi trusts may be amended to incorporate these rules. However, in order to avoid potential undesirable consequences, the IRS requires that these amendments must be adopted by May 16, 2001.

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