Sec. 1042 and ESOP Stock allocations

[Guest DDB]

Four years ago, A shareholder, who owned 10% of the company and is also an employee, sold 40% of his stock to an ESOP. In a transaction where the ESOP Acquired 40% of the Company. This Shareholder did not elect Sec. 1042 deferral treatment and has participated in allocations of stock in the ESOP. In December 2000 This shareholder sold his remaining stock to the ESOP. If this shareholder remains an employee and elects Sec. 1042 deferral treatment, (1)Can he receive an allocation of stock in the ESOP for the year 2000 (assuming only shares acquired by the ESOP in the first transaction are allocated in 2000)? (2) Could he participate in any remaining allocations of stock acquired in the first transaction in future years?

[RLL]

Hi DDB ---

A seller who elects 1042 treatment can still share in the allocation of stock under the ESOP (if he/she is otherwise eligible to so participate), but only with respect to shares that are NOT subject to IRC Section 409(n)....that is, any shares acquired by the ESOP other than in a 1042 transaction.

The ESOP's recordkeeper should be separately "tracking" shares which are and are not subject to the Section 409(n) allocation restrictions.

Assuming that the 2000 allocation date is 12/31/00, this shareholder can only share in the allocation of any "non-409(n) shares" for 2000 and later years, but he/she cannot share in the allocation of any "409(n) shares."