Sale of stock to ESOP that was established and merged into another as part of a single plan qualifies under s. 1042

Article Abstract:

The IRS National Office ruled in Technical Advice Memoranda 9631002 and 9631003 that shareholders in a corporation being acquired were entitled to the tax deferral treatment provided for by IRC section 1042. One corporation established an employee stock ownership plan (ESOP) so that shareholders in the company it was acquiring could exchange their ESOP interests for ESOP interests in the acquiring corporation. The District Office asserted that the transaction lacked substance, but the National Office found that, since all technical requirements were met, section 1042 treatment was required.

Planning, Corporate reorganizations, Tax-free exchanges

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Dividends paid to ESOP and deductible for income tax purposes not deductible for AMT purposes

Article Abstract:

The US Court of Appeals for the Fifth Circuit ruled in Snap-Drape, Inc. v. Commissioner that IRS regulations under IRC section 56(g) applied retroactively to the taxpayer's employee stock ownership plan (ESOP). The regulations disallowed deduction for alternative minimum tax purposes of section 404(k) dividends. The taxpayer argued that the regulations were invalid because the dividends paid to the ESOP were deductible compensation. The 5th Circuit found that the regulations were legislative in nature and were not arbitrary or capricious.

Cases, Tax deductions, Minimum tax

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Redemption of stock from ESOP constitutes sale and not deductible dividend

Article Abstract:

The IRS ruled in Technical Advice Memorandum 9612001 that payments made by a corporation to redeem stock held by its employee stock ownership plan (ESOP) were not deductible under IRC section 404(k) as dividends. The IRS found that the participants, and not the ESOP as a whole, were the beneficial owners of the stock. Sale or exchange treatment was appropriate, according to the IRS, because the redemption was a complete termination of the participants' interest in the stock.

Expense deductions, Stock redemption

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