nonalloaction period

[Tom Poje]

An individual was a 25% owner at the time he sold shares to the ESOP and took a 1042 election.

it is now 10 years later, and the individual is no longer a 25% owner.

is the person eligible to receive shares (the loan is now paid off), or does the nonallocaton period last forever because they were a 25% owner at the time of the sell.

[A Shot in the Dark]

Tom:

The non allocation period relative to the shareholder electing 1042 is the later of the date that is 10 years after the date of the transaction or 10 years from the plan allocation resulting from the final payment on the loan used to purchase the shars for which 1042 was elected.

The non allocation period for a 25% or more shareholder is perpetual.

[Tom Poje]

that much I understand, but the person is now no longer a 25% shareholder, so the question is :

is 'perpetual' based on ownership when shares were put into the plan, or at the current time.

[A Shot in the Dark]

Tom:

The perpetual non allocation is based upon the ownership % at the time to sale.

The fact that the 25% or more shareholder is no longer a shareholder is irrelevant.

[RLL]

Assuming that the former 25% shareholder is otherwise eligible, he/she is entitled to share in the allocation of any shares that are acquired by the ESOP from the employer corporation or from a selling shareholder who did not elect 1042 treatment with respect to that sale. IRC Section 409(n)(1) applies only to shares acquired in a 1042 sale.

The former 25% shareholder is also entitled to share in the allocation of any shares that are acquired by the ESOP (from an unrelated shareholder) in a 1042 sale that occurs more than one year after he/she ceased to be a more-than-25% shareholder. See IRC Section 409(n)(3)(B).

[Tom Poje]

so lets see if I have all this correct, as it gets rather convoluted.

Mr A more than 25% owner

Daughter of A

Mr B more than 25% owner

"tainted" stock was put in the ESOP from both A and B with 1042 election

additional stock "Untainted" as well

so all employees receive untainted, but the 2 owners and daughter can never receive tainted even though the 10 years are now up and the owners no longer own 25%, becauseat the time of the sale they were all 25% owners.

now they sell their remianing shares to the ESOP. (including the stock A and B own in the plan they are still not 25% owners at the time of the sale.)

so I have "new tainted from A", and "new tainted from B"

is the following correct - neither A or B can receive the new tainted shares for 10 years, but after that they can because they are not currently 25% owners. (ignore the fact that A will be something like 83 in 10 years, and it probably wont matter in A's case.)

the daughter, because of the special lineal descendant rule can receive up to 5% of "new tainted A" during the 10 year period, but no shares of "new tainted B".

[A Shot in the Dark]

Tom:

Convoluted is a very good word in this case.

I am doing a little research before I answer your question.

Here is what I am not sure of:

In your example, you note that Mr. A and Mr. B are no longer 25% plus shareholders. I am presuming that you deem them less than 25% shareholders because of the previous sale to the ESOP, i.e. the ESOP owns more than 51% of the outstanding shares of stock. In determing the ownership percentage for Mr. A and Mr. B, I am not sure you count the shares held by the ESOP, ie. Mr. A and Mr. B may still be considered 25% plus shareholders.

In your example, I presume that Mr. A and Mr. B will elect 1042 on the second sale to the ESOP.

[Tom Poje]

correct, though maybe I confused you. suppose ther are a total of 55% of the company shares in the ESOP.

suppose Mr A currently owns 5% of the nontainted shares in the ESOP.

suppose he is currently a 21% owner shares outside the plan. my understanding he is a 26% owner.

dang, I didn't even think about it, but because of family attribution, he owns his daughters shares as well.

I see this plan as a 'fun' one to process, if eating liver, being put on a rack, etc are all your cup of tea. especially if forfeitures are involved. tell the software to handle that type of mess. lets see, all share forfeitures from untainted shares , the initial tainted shares cant be forfeited to the 2 owners and the daughter, the new tainted shares can be received by the daughter if they are from her dad...

the original conditions started out something like a 65% owner and a 35% owner, each 'donated' a different amount to the plan. they now own 43% outside the plan, though I am not sure exactly how much individually at the moment.

maybe I will get lucky and they wont take a 1042 election this time around.