25% owner no 1042 election

[Guest mickiemurphy]

I have a closely held c-corp with several 30% owners. They are interested in starting an ESOP. One of the 30% owners would like to sell an equivalent of 5% of company stock to a new ESOP to start the plan. He would not be able to take the 1042 election.

I have several questions.

Is there a problem with the ESOP starting out with such a small percentage of outstanding stock?

Would the 30%, now 25% owner be prohibited from receiving allocations of stock if there is no 1042 election?

Would the employee-son of the selling owner be prohibited from receiving an allocation of stock if there is no 1042 election by the father?

[stephen]

If there is not a 1042 election the now 25% owner and the son would be allowed to share in the allocation of those shares.

There is not a problem with the ESOP starting with a small number of shares.

[BeckyMiller]

You did not describe how large a payroll base you have for this company. I agree with stephen's remarks, but just wanted to note that there may be a problem in getting capital gain treatment for the seller, if there is a very small payroll base. See Rev. Proc. 87-22 and a bunch of PLRs that were issued under this procedure.