Situation:

Allen and Barbara are each 50% owners of Company A&B. Barbara's daughter Claire works for the company as well.

In 1990 Allen and Barbara each sell 15% to the ESOP and elect 1042 on their sale. Since Allen and Barbara (and Claire by attribution) were 25% shareholders at the time of the transaction they can never share in the allocation of shares from loan #1.

In 2001 Barbara retires and sells her remaining 35% to the ESOP (Loan #2). She does not make a 1042 election this time. Thus, Allen and Claire can share in the allocation of these shares.

In 2005 Allen is planning on selling his remaining 35% and electing 1042 (loan #3). As was the case with Loan #1 Allen is a 25% shareholder and will never be allowed to share in the allocation of these shares.


Question:

Can Claire share in the allocation of the shares from Loan #3?

Allen and Barbara are not married? Claire is Barbara's daughter only, not Allen's, right?

Then, Claire could participate in the shares associated with Allen's 2005 sale.

Obviously, this assumes that nothing else gets in the way - she is eligible, hasn't accumulated 25 % ownership due to allocations of the prior sale, etc.

See IRC Section 409(n) - definitions of a 25% shareholder and of family.