Allocation of 1042 Shares

[Guest John Nelson]

Assume that A, B, C, D and E sell shares to ESOP. A and B elect 1042 treatment with respect to their shares; C, D and E do not make a 1042 election. (A, B, C, D and E are unrelated and owned less than 25% of corporation.) Two questions: (1) Can C, D and E receive allocations under the ESOP of both 1042 and non-1042 shares? It seems to me that the answer is "yes" because C, D and E did not make a 1042 election. (2) Can A and B receive allocations under the ESOP of the non-1042 shares (i.e., the shares sold to ESOP by C, D and E)? The language under Code 409(n) seems to prohibit the allocation to A and B of shares "to which section 1042 applies". If this is correct, then it would seem that A and B could receive non-1042 shares. Thanks for your help.

[RLL]

(1) yes

(2) yes