ESOP Update: Deduction Disallowance Under Section 267; Section 409(p) Letter Ruling; and King & Prince Seafood Decision

IRS Emerging Issue: S Corporation Accrued Expenses to ESOP Participants a Potential Pitfall for the Less Than 100% S Corporation ESOP

The director for prefiling and technical guidance at the Internal Revenue Service (IRS) issued a memorandum on September 28, 2007 (LMSB-04-0907-064) providing notification of an emerging issue related to S corporation ESOPs and deductions for certain accrued expenses in respect of related parties, including accrued compensation for ESOP participants. At issue in the memorandum is Section 267 of the Internal Revenue Code (the Code). The memorandum was circulated to all executives and managers of the IRS’s Large and Mid-Size Business (LMSB) division, and to the chief of the Appeals Division Counsel. The memorandum advised any IRS representative who identifies a taxpayer who may be impacted by the memorandum to refer the matter to the S corporation technical advisor...

IRS Issues First Private Letter Ruling on Section 409(p) of the Code

On January 25, 2008, the IRS published the first ruling on the S corporation ESOP anti-abuse rules codified in Section 409(p) of the Code since the rules became law in 2001. Because the rules were complicated and left many questions unanswered, in 2003 the Treasury Department issued temporary and proposed regulations to provide guidance on the application of the provisions of Section 409(p) of the Code. On December 17, 2004, a new set of temporary and proposed regulations were issued to clarify, expand, and modify the 2003 regulations; these regulations were ultimately finalized in December 2006. Despite these actions by the Treasury Department, it has taken the IRS more than seven years to first interpret these complicated and draconian rules...

U.S. District Court Opinion Rendered in King & Prince Seafood Corporation ESOP Litigation

In a lengthy opinion, the U.S. District Court for the Southern District of Georgia recently rendered its decision on defendants’ motions for summary judgment in DelRosario and Taylor v. King & Prince Seafood Corporation. The court’s opinion encompasses a number of areas; this discussion focuses on the main claim—the claim for benefits...

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