IRS Validates Price Protection Agreements for S Corporation ESOPs

The IRS marked the Fourth of July this year by issuing a private letter ruling that is favorable to S corporation Employee Stock Ownership Plans (ESOPs). The IRS confirmed that an ESOP company can enter into a price protection agreement that favors certain shares without jeopardizing its S corporation status.

In Private Letter Ruling 200827008, the IRS validated a form of price protection commonly used in multistage ESOP transactions. In the letter, the IRS concluded that a floor price protection agreement—which guaranteed a minimum repurchase price for some, but not all, of the shares held by the ESOP—did not create a second class of stock, and thus did not adversely affect the company’s S corporation status.

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