Distributions after conversion from C Corp to S Corp

[Guest tmills]

Section 409(o)(1)(B) allows ER securities acquired w/ the proceeds of a loan described in 404(a)(9) to be exempted from the distribution requirements of 409(o)(1)(A) until the close of the plan year in which the loan is repaid. 404(a)(9)© says the paragraph does not apply to S corporations. What happens in the case of a C corporation that has a leveraged ESOP that includes the provision in 409(o)(1)(B) that later converts to S? Does the restriction on distributing stock acquired w/ a loan remain, or since 404(a)(9) does not apply to S corporations, does that mean the stock must now be distributed subject only to the rules of 409(o)(1)(A)? It seems reasonable that if a leveraged C corporation ESOP loses the benefit of the 404(a)(9)(B) interest exclusion upon converting to S, it would also lose the ability to delay distribution under 409(o)(1)(B) upon conversion to S. Of course I'm sure other arguments could be made too. Any guidance would be appreciated.

[Guest tcroscut]

You will receive a variety of responses to this question. Some believe that 409(o)(1)(B) is not applicable to S Corps, while others believe it is.

The reference to 404(a)(9) in section 409(o)(1)(B) is used solely to define the term "loan." Therefore, we believe that 404(o)(1)(B) IS applicable to S Corps, as long as the plan document recites the language of 404(o)(1)(B).

So in response to your question, there would be no change in the distribution schedule under 409(o)(1)(B) when the S Corp converts to a C Corp.

If you are a member of The NCEO, I believe there is also a post on their message board on this exact question.