409(n) Prohibited Allocation

[JRN]

100% owner intends to sell 30% of shares to the ESOP and elect 1042 treatment with respect to the sale. Owner's son is an officer of the Company and part of the "next generation" management team. Allocation to owner's son would be less than 5% of the 1042 shares held by the ESOP.

The owner's son is an individual described under IRC section 409(n)(1)(A) -- he is an individual related to the taxpayer under IRC section 267(b). My question is: Is the owner's son also a person under section 409(n)(1)(B)? Under the attribution rules of section 318(a), the son would be considered to own his father's shares, so he would be a "person who owns more than 25%" of the Company.

But, and maybe this is just semantics, IRC section 409(n)(1)(B) starts out by including "any other person", which I think pretty clearly is referring back to 409(n)(1)(A). In other words, the restriction under subparagraph (B) is picking up persons who are not described in (A). Because son is described under subparagraph (A), he is not included again under (B).

Anyone else read this the same way?

Thanks.

[RLL]

I'm sure that there are others who accept the interpretation that you are proposing. But the better interpretation, which has been the position of the IRS, is that the son is treated as a more than 25% shareholder and cannot receive allocations of the shares sold by his father.

The consequences of violating section 409(n) can be so great that it's not worth the risk of taking your aggressive interpretation. There are other ways to compensate the son without such risk.