Attorney-at-Law

DON’T BE ACCRUAL

In Uncategorized on 06/13/2017 at 18:25

Judge Lauber has a new take on the 197th item on the Rolling Stone all-time best song list, a classic from my fourteenth summer so long ago. Here’s Steven M. Petersen and Pauline Petersen, 148 T. C. 22, filed 6/13/17. But the story is really about their Sub S and ESOP.

Steve and Pauline and their Sub S’s trusty employee John (Larue being on board only because she filed jointly with John) were all participants in the Sub S’s ESOP, which everyone agrees was qualified. The Sub S accrued salary, payroll taxes and ESOP contributions for Steve, Pauline and John, but didn’t pay until the following January, the year when Steve and Pauline and John paid taxes thereon. Sub S was of course a calendar year, accrual basis taxpayer.

IRS swoops in and, citing Section 267(a)(2) deferral for any payment to a related person until said related person pays tax thereon, hits Steve and Pauline and John and Larue with SNODs for their flow-through deductions in the accrued year.

IRS claims that the ESOP stock held in their respective names makes Steve and Pauline and John related persons to the S Corp, by virtue of being beneficiaries of a trust which is a stockholder in the Sub S.

Apparently, this is a case of first impression, so trusty counsel for Steve and Pauline and John tries everything from Section 318 attribution rules (but 318 attribution is Subchapter C, and 267 is Subchapter B, so Section 318(a) limits 318 attribution to “this subchapter”) to “The ESOP is not a trust under UT law” (so what, says Judge Lauber, federal law controls). Besides, the ESOP is qualified and to comply with ERISA and the whole statutory scheme (and its own organic documents), the ESOP must be a trust.

Judge Lauber, more patient than I, wades through the whole mass of arguments, but at the end of the day, his message to Steve and Pauline and John and Larue is that of The King: Don’t Be Accrual.

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