Meaning of "substantially all" for restricting distributions of stock

[lalaland]

Has anyone ever seen guidance as to what the meaning of "substantially all" under IRC 409(h)(2)(B)(ii)(I) is? The Code permits an ESOP to require cash distributions (and not permit in-kind distributions) where the corporations charter or bylaws restrict "substantially all" of the employer securities to employees or a qualified plan. Does anyone have any idea what "substantially all" means?

[ESOP Guy]

Ok, I was hoping someone had something more useful then me. No I have not seen a definiton of "substantially all". In fact what I have always seen is in effect is "all". That is to say what I see is that the only people allowed to shares outside of the plan was employees. This was often, but not always, the founding family still owned shares and those people worked for the company.

What i don't recall seeing ever was a set of bylaws that allowed non-employee members of the founding family (for example) and only employees own shares outside the ESOP. This was done with the claim those few founding family members ownership being small enough to mean "substantially all" shares were restricted.

[GMK]

I, too, was interested in the answer, although it doesn't apply to us.

google search results included:

http://www.irs.gov/irm/part7/irm_07-025-025.html

https://www.ftb.ca.gov/forms/misc/1028.pdf

which indicate that the regulations do not define "substantially all," but in a few sections of the IRC (not applicable sections), it is interpreted to be 85% with the proviso that facts and circumstances may apply. A HUD article defined it as 80% for certain programs, but I wouldn't use that as an authority for ESOP rules.

FWIW, I wouldn't use 85% without an ERISA lawyer's concurrence. I'd prefer to be north of 95%.

[lalaland]

Thanks for the help. Your thoughts are the same as mine. Prior to EGTRRA, the IRS also interpreted "substantially all" as 85% for purposes of applying the same desk rule to a severance on account of the sale of substantially all assets of the company. This was in the prior verson of the 401(k) regulations in Treas. Reg. 1.401(k)-1(d)(4)(iv), but was repealed in the 2004 regulations because EGTRRA repealed the same desk rule. Its not determinative but shows what the IRS is thinking in the qualified plan area.