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Treasury & IRS Tighten Regulations Surrounding ESOP Plans

by Leroy Baker, Tax-News.com, New York

20 December 2004


The Treasury Department and IRS has issued proposed temporary regulations designed to shut down abusive tax shelter schemes involving ESOP-based pension schemes.

Section 409(p) of the tax code generally prohibits accruals or allocations under an employee stock ownership plan (ESOP) that holds stock of an S corporation, where the ownership interest in the ESOP or in rights to acquire the corporation are so concentrated among 10% owners that they hold 50% or more of the interests in the corporation.

The regulations replace proposed temporary regulations that were issued in 2003 and address a wide variety of issues under section 409(p), including the key definitions of a prohibited accrual or allocation, a disqualified person and a non-allocation year.

“These regulations support our efforts to shut down abusive schemes, in this case those skirting pension laws," IRS Commissioner Mark W. Everson commented.

Greg Jenner, Treasury Acting Assistant Secretary for Tax Policy, added: “These regulations respond to the comments we received from the public on the 2003 regulations, including comments recommending changes to ensure that ESOPs holding S corporation stock are not used inappropriately as tax shelter devices.”

The regulations will generally go into effect for plan years beginning on or after Jan. 1, 2005, subject to several special effective date rules. A public hearing on the regulations is scheduled for April 20, 2005.


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