Determination of > 5% Owner Status

[Guest JSCOTT]

An ESOP owns 100% of the corporate stock currently outstanding. There is a group of corporate officers who own options to buy stock in the future.

I realize that none of the stock allocated to participants is attributable to them for purposes of determining ownership. But is the stock owned by the ESOP included in the denominator in determining ownership percentages?

For example if an ESOP owns 100,000 shares of stock, and Employee Joe has an option to purchase 5,000 shares of stock outside of the plan, how is Joe's ownership percentage in the corporation computed for determining whether he is a > 5% owner?

Is it 5,000/100,000+5,000 = 4.76%

or is it

5,000/5,000 = 100%

Thanks for whatever insight you can provide. Again, I understand that none of the shares in the ESOP are attributable to Joe, therefore they clearly are not to be included in the numerator of the ownership fraction. What I am concerned with is whether the ESOP shares are to be used in the denominator of the fraction.

[Harwood]

Pardon my ignorance - why are shares in the ESOP allocated to Joe not considered to be owned by Joe?

[Guest JSCOTT]

Joe is not considered to own the shares that have been allocated to him in the ESOP due to IRC Section 318(a)(2)(B)(i). Stock owned in a trust is normally allocable to beneficiaries, unless the trust is described in Section 401(a).

[Harwood]

Thank you for the 318 reference.

Reg 1.416-1, T-16 and T-17, refer to " the outstanding stock of the corporation" and "all stock of the corporation."

I think your denominator includes all shares, including those in the ESOP: 105,000 in your example.

[Guest JSCOTT]

Thank you!