REVENUE RULE 95-57

1995-2 C.B. 62, 1995-35 I.R.B. 5

EMPLOYEE STOCK OWNERSHIP PLAN (ESOP); VOTING RIGHTS

Released: August 4, 1995
Published: August 28, 1995

Section 409. Qualifications for Tax Credit Employee Stock Ownership Plans

Employee stock ownership plan (ESOP); voting rights. This ruling describes a situation where an ESOP will not violate section 409(e) of the Code merely because the trustee of the ESOP votes the shares of stock allocated to participants' accounts for which no directions were timely received from the participants.

Employee stock ownership plan (ESOP); voting rights. This ruling describes a situation where an ESOP will not violate section 409(e) of the Code merely because the trustee of the ESOP votes the shares of stock allocated to participants' accounts for which no directions were timely received from the participants.

ISSUE

Does an employee stock ownership plan (ESOP) fail to comply with the pass- through voting requirements of s 409(e)(2) or (3) of the Internal Revenue Code merely because the trustee of the ESOP votes the shares of stock allocated to participants' or beneficiaries' accounts for which no directions are timely received from the participants or beneficiaries?

FACTS

X Corporation established ESOP Y for the benefit of its eligible employees. X Corporation has a registration-type class of securities within the meaning of s 409(e)(4) of the Code. The provisions of ESOP Y governing the voting of X Corporation securities (X Corporation shares) specify that participants and beneficiaries are entitled to direct the ESOP trustee as to the manner in which to vote X Corporation shares allocated to their accounts, and require that the trustee vote the shares in accordance with the timely directions of these participants and beneficiaries. ESOP Y also provides that if the trustee does not timely receive voting directions from a participant or beneficiary with respect to any X Corporation shares allocated to that participant's or beneficiary's account, the shares shall be voted by the trustee. This procedure, with respect to voting of the allocated but non-directed shares, is disclosed in information provided to participants and beneficiaries prior to the deadline for participants or beneficiaries to submit directions for voting shares. Pursuant to this procedure, the trustee of ESOP Y votes the X Corporation shares allocated to the accounts of participants or beneficiaries for which no voting directions are timely received from the participants or beneficiaries.

LAW AND ANALYSIS

Section 4975(e)(7) of the Code provides, in part, that a plan shall not be treated as an ESOP unless it meets the requirements of s 409(h), s 409(o), and, if applicable, s 409(n). Section 4975(e)(7) of the Code also provides that, if the employer has a registration-type class of securities (as defined in s 409(e)(4)), the ESOP must meet the requirements of s 409(e).

Section 401(a)(22) of the Code provides, in general, that a defined contribution plan (other than a profit-sharing plan) must meet the requirements of s 409(e) in order to be qualified if (1) the plan is established by an employer whose stock is not readily tradable on an established market and (2) more than 10 percent of the total assets of the plan are securities of the employer.

Section 409(e)(1) of the Code provides that, in general, a plan meets the requirements of s 409(e) if it meets the requirements of s 409(e)(2) or (3), whichever is applicable. Section 409(e)(2) of the Code provides that if the employer has a registration-type class of securities, the plan meets the requirements of s 409(e) only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which to vote securities of the employer that are entitled to vote and are allocated to the account of such participant or beneficiary.

Section 409(e)(3) of the Code provides that if the employer does not have a registration-type class of securities, the plan meets the requirements of s 409(e) only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which to exercise voting rights, under securities of the employer that are allocated to the account of such participant or beneficiary, with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all the assets of a trade or business, or such similar transaction as the Secretary may prescribe in regulations.

While s 409(e)(2) and (3) of the Code require that ESOP participants and beneficiaries be entitled to direct the plan as to the manner in which to vote the shares of employer securities allocated to their accounts, neither s 409(e) nor s 4975(e)(7) prohibits the voting of allocated shares for which no directions have been timely received from the participant or beneficiary. Accordingly, the voting of the allocated but non-directed shares of employer securities by the trustee is not inconsistent with s 409(e)(2) and (3) of the Code.

HOLDING

The voting by the ESOP Y trustee of the X Corporation shares allocated to the accounts of participants or beneficiaries for which no directions are timely received from the participant or beneficiary will not cause ESOP Y to have failed to comply in operation with the pass-through voting requirements of s 409(e)(2). The result would be the same if Corporation X did not have a registration-type class of securities and ESOP Y participants and beneficiaries were entitled, pursuant to s 409(e) of the Code, to direct the voting of X Corporation securities allocated to their accounts.

DRAFTING INFORMATION

The principal author of this revenue ruling is Cathy Vohs of the Employee Plans Division. For further information regarding this revenue ruling, please contact the Employee Plans Division's taxpayer assistance telephone service between the hours of 1:30 and 4:00 p.m. Eastern time, Monday through Thursday, on (202) 622-6074/6075 or Cathy Vohs on (202) 622-6214 (These telephone numbers are not toll-free numbers).

Rev. Rul. 95-57, 1995-2 C.B. 62, 1995-35 I.R.B. 5