Is an ESOP participant considered to be an "owner" of the S corporation for tax purposes?

[billfgrady]

Looking at Sections 1372 and 318, is an ESOP plan participant considered to be an owner of an S corporation if they don't own stock outside of the ESOP? The definition of 2% owner under Section 1372 incorporates the attribution rules under Section 318. Generally, under Section 318, you don't have attribution of ownership from a qualified plan to a qualified plan participant. However, I've found PLRs out there (albeit not directly on point) that suggest that the participant is the owner of the stock that the ESOP owns simply because he or she is the "beneficial" owner or because 318 applies. Any thoughts?

[GMK]

Generally, the ESOP is the owner of the shares in the ESOP, and the participants are not considered to have ownership of the shares in their accounts. For example, the shares allocated to a participant's account are disregarded in determining whether the participant is a more than 5% owners, and such.

That being said, there are cases where the ESOP account shares are counted toward the participant, for example, in the case of a "disqualified person" (owns 10% or more the ESOP's shares and synthetic equity in the company, or 20% or more in conjunction with family members) and nonallocation years and that sort of ugliness, which you of course will avoid.

For further reference:

http://findarticles.com/p/articles/mi_qa37...01/ai_n19431693

http://www.crowechizek.com/crowe/Publicati...tail.cfm?id=469

[Marcus R Piquet]

IRC §1372(b) defines a 2% shareholder as "any person who owns (or is considered as owning within the meaning of section 318) . . . more than 2 percent of the outstanding stock . . .)

IRC §318(a)(2)(B)(i) states "Stock owned, directly or indirectly, by or for a trust (other than an employees' trust described in section 401(a) which is exempt from tax under section 501(a) ) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust" (emphasis added). ESOP assets are held by trusts described in §401(a) which are exempt under 501(a), therefore beneficial ownership through an ESOP's trust would not make anyone a 2% shareholder for purposes of §1372.

[BeckyMiller]

Where some of the confusion arises is because Section 267 sets the attribution rules for certain provisions of the Code. Under this section, there is attribution of stock out of a trust to the beneficiaries without any exclusion for 401(a) trusts. But, I agree that for purposes of Section 1372, there is no attribution out of the ESOP trust.