Under Section 1372 of the Internal Revenue Code, 2% shareholders of S corps. are treated as partners in a partnership for fringe benefit purposes. What if the individual is a 2% shareholder solely because of stock owned in an ESOP plan? Are they considered a 2% owner for Section 1372 purposes?

Hi kredlin ---

IRC Section 1372(B) defines 2% shareholder by reference to Section 318 attribution rules. Section 318(a)(2)(B)(i) provides that stock held by a Section 401(a) employees' trust [that would include an ESOP] is not treated as owned by the beneficiaries.

Accordingly, company stock allocated to a participant under an ESOP is not treated as owned by that individual for purposes of the 2% shareholder rule of Section 1372.