Abusive SESOPs.

• Author: Laffie, Lesli S.
• Position: Employee stock ownership plans holding S corporation stock

Proposed and temporary regulations (REG-129709-03, TD 9081) under Sec. 409(p) shut down abusive arrangements involving employee stock ownership plans holding S corporation stock (SESOPs).

The regulations will generally affect SESOP sponsors and participants, and respond to arrangements that the IRS and Treasury believe are marketed to avoid Sec. 409(p), by giving former S shareholders deferred compensation from a related management company or special rights to acquire the corporation's assets. (For background, see Adler, "ESOP Ownership of S Corporations: Good Use or Bad Abuse?," TTA, April 2003, p. 197.)

The regulations provide an anti-abuse provision, treating acquisition rights as synthetic equity in certain situations. Specifically, the treatment applies to options or rights to acquire assets of an S corporation or a related person that are part of a structure providing rights to the holder comparable to the rights provided by arrangements identified as synthetic equity under the regulations and in which the principal purpose of the structure is Sec. 409(p) avoidance or evasion.

In addition, the...