SESOP may repurchase stock distributed in IRA rollover.

• Author: O'Driscoll, David
• Position: S corporation employee stock ownership plan, individual retirement account

The Service recently modified Rev. Proc. 2003-23, by permitting an S corporation employee stock ownership plan (SESOP) to assume the corporation's rights and obligations to repurchase the corporation's stock that the SESOP distributes to a participant's IRA.

Analysis

A SESOP that holds S stock and permits distributions of employer securities must permit participants to elect to have any eligible rollover distribution of S stock be paid directly to an eligible retirement plan, including an IRA. An IRA trustee or custodian, however, is not a permissible S shareholder; see Sec. 1361(b) and (c)(6).

Under Sec. 409(h)(2)(B), a SESOP that provides for distributions of securities can provide that the S stock included in the distribution is subject to a repurchase requirement. Thus, a SESOP can provide that any distributed S stock is subject to immediate repurchase by the S corporation on a direct rollover of the stock from the SESOP to an IRA. If the following requirements are satisfied, the Service will accept the position that the distribution does not affect the S corporation's election to be taxed as an S corporation:

* The SESOP's terms require that the S corporation repurchase the stock immediately on the SESOP's stock...