Esop participant becomes company owner

[Guest DeePA]

C-corp. sponsors an esop and esop owns 40% of shares.

C-Corp. has one 60% individual owner (and esop owns the other 40%).

The 60% individual owner would like to retire and has a potential buyer in an employee who is also a participant in the ESOP.

Once the sale goes through, i believe the employee (who will become 60% owner) can still participate in esop. My logic is that the employee was not an owner prior to or on the date the 1042 transaction and esop was set up (3 years ago).

In addition, I do not think the original owner's 1042 transaction is tainted in any way.

Do you agree???

Thanks

[RLL]

Hi DeePA ---

I disagree with your conclusion regarding the new 60% shareholder. Pursuant to IRC section 409(n)(1)(B) and (3)(B)(ii), someone who is a more-than-25% shareholder on any date that 1042 stock is allocated cannot share in that allocation....even if that participant was not a shareholder at the time of the 1042 sale. In your situation, the new 60% shareholder will continue to be an ESOP participant but cannot receive additional allocations of any 1042 shares.

You are correct that the original 1042 sale itself is not affected by the subsequent sale of stock by the 60% shareholder.