On November 2, 2001, owners of C-Corporation owners sell 45% of stock to the ESOP. Owners make a 1042 election. On November 30, 2001, owners sell remaining 55% of stock to 2 employees. ESOP is on a calendar year.

Are these two employees prohibited from ever receiving an allocation of the "1042" stock? Even for the 2001 plan year?

Hi Scrappy ---

If each of the two employee shareholders continue to own more than 25% of the outstanding shares on any allocation date during the "nonallocation period" defined in IRC section 409(n)(3)©, which is at least 10 years after the sale, they are prohibited from sharing in the allocation of the 1042 shares under the ESOP. This includes the 12/31/01 allocation.

Did the two employees pay the same per share price as the ESOP paid for its stock?

Yes, they paid the same amount per share. And our plan document clearly states the "nonallocation period". Thanks for the quick reply.

I have another question about deductibility. One attorney told me that according to 404(a), all payments to an ESOP's leveraged loan must be within the 25% of compensation limit. Yet, I have an article stating a C-Corporation leveraged ESOP may deduct more than 25%, if the principal payments of the loan do not exceed 25% of eligible compensation as long as 1/3 of the contributions are not allocated to the HCEs.

What's correct?

Thanks.

Look at IRC section 404(a)(9), which allows a C corporation to deduct contributions used by the ESOP to pay loan interest without regard to the 25% of compensation limit.