Cost basis for leveraged ESOP shares

I tried to find this topic addressed, but was unsuccessful.  It seems obvious to me, but what do I know.

Leveraged ESOP, closely held stock, has only one tranche of stock acquired with the proceeds of a single ESOP loan that has not been renegotiated.  Dividends on unallocated shares are used to pay a portion of the stock loan.  In the third year of the loan, 50,000 shares are released per the amortization schedule.  The loan payment was $500,000, of which $100,000 was from unallocated dividends and $400,000 was an employer contribution. There are a few forfeitures that resulted from participants leaving who were less than fully vested.  Therefore, active participants were allocated shares as a result of the loan payment as well as reallocation of forfeitures.  However, only the shares that were released by virtue of the loan payment are using the cost basis of the shares when the loan was funded; the shares released as a result of using unallocated dividends and forfeitures are allocated with a cost basis of the FMV as of the end of the year.  I had always understood that all shares acquired with the proceeds of a stock loan carry the basis at which they were acquired, regardless of release of shares or reallocation of forfeitures.  Am I wrong here?  

Thanks to any all for their wisdom and insight!

On 3/14/2024 at 2:30 PM, Tegernsee said:

I had always understood that all shares acquired with the proceeds of a stock loan carry the basis at which they were acquired, regardless of release of shares or reallocation of forfeitures.  Am I wrong here?

You are correct.  As long as the shares remain in the ESOP (are recycled amongst participant accounts and are not redeemed via distribution then re-contributed), they carry the same cost basis as the original acquisition.

My TPA had us do a blended cost basis per share so no admin headache dealing with multiple cost basis.  Are you an S Corp?  If so, don’t forget about the S Corp basis adjustment! 

Thanks, it’s not an S corp (thank goodness!).   This is the only stock that has been acquired by the ESOP, so there would be no other cost bases to deal with, so I think all shares in this plan would have a single cost basis.