ESOP stock sale proceeds not subject to Sec. 415 limits.

• Author: Patterson, Martha Priddy
• Position: Employee stock option plan, IRC s. 415

In a reversal from its previous positions in letter rulings, the IRS--in as-yet-unnumbered Technical Advice Memorandum (TAM)--has ruled that proceeds from the sale of unallocated shares held in an employee stock ownership plan's (ESOP's) suspense account resulting from the sale of company stock will be considered earnings and will not constitute Sec. 415 annual additions to the ESOP participants' accounts.

Background

In the TAM, X corporation set up a leveraged ESOP under Regs. Sec. 54.4975-7 in 1993, and purchased employer securities held in an unallocated suspense account. X contributed to repay the loan in 1993, 1994 and 1995. In 1995, an unrelated third party bought all of X's assets at a substantial premium in an arm's-length transaction. X's shareholders voted to liquidate X. A portion of the liquidation proceeds relating to shares in the loan suspense account was paid to the plan in 1996, to be used by the plan to repay the remaining balance of its 1993 stock acquisition indebtedness.

As of the record date, the ESOP held 374,335 shares of common stock, representing approximately 69% of X's outstanding common stock. Prior to the 1996 plan year, approximately 87,492 shares had been released and allocated from the loan suspense account. A contribution of approximately $883,700 was to be made in the 1996 plan year, resulting in the additional release and allocation of another 44,000 shares. Accordingly, of the ESOP's shares, 242,843 shares would still be held in the suspense account. The estimated proceeds from this sale of the stock held by the plan was $7,548,438, from which repayment of the $5,318,055 in ESOP notes would be made, leaving a balance of $2,230,383.

In 1996, X's payroll was reduced to just a few employees and X did not have a payroll when that process was completed. X submitted an application to terminate the plan, proposing to allocate the liquidation plan earnings among the participant accounts in proportion to the size of their respective account balances. X amended the plan to provide for such allocations.

Issues Sent to the National Office

Two questions were posed to the National Office:

1. With respect to a leveraged ESOP in which the plan allocates the proceeds from the sale of the unallocated shares previously held in suspense pursuant to Regs. Sec. 54.4975-7(b)(8), are all or a portion of the proceeds from such sale, when allocated, annual additions subject to Sec. 415?

2. If a portion of the above-described...