IRS PLR 201828007 illustrates how employee stock ownership plans (ESOPs) are different from other qualified retirement plans in that several tax rules are dependent on the corporate status of the sponsor; specifically, various rules apply differently whether the sponsor is taxed as a C or S corporation.
In the ruling, the taxpayer requested that the IRS address the consequences of a C corporation subsidiary adopting the ESOP of its S corporation parent company.
The parent company sought a ruling that its stock held by the ESOP will constitute qualifying employer securities with respect to the subsidiary, and that the application of sections 409(h), 409(p), 512(e)(3) and 4975(e)(7) would not be affected by the C corporation subsidiary’s adoption of the plan. Accordingly, the ESOP will: (1) continue to allow only distributions in cash and not in employer securities from the plan; (2) remain subject to allocation restrictions for disqualified persons; (3) not fail to be an ESOP due to the adoption by its C corporation subsidiary; and (4) not disrupt the unrelated trade or business exception applicable to ESOPs owning S corporation stock.
Ultimately, the IRS concluded that the C corporation’s adoption of its parent company’s ESOP will not affect its status and the rules will continue to apply based upon the S corporation parent, as the ESOP held employer securities consisting of stock in an S corporation.
While this ruling addresses specific tax rules governing the plan status of a particular taxpayer, it illustrates a broader general principle. There are several different rules that apply to S and C corporations for ESOPs, and the stock held by the plan governs the rules applied.
Thus, this PLR serves as a good reminder to ESOP sponsors to always consider carefully the impact of the plan’s corporate structure, as its specific tax rules do not typically exist in other qualified retirement plan settings.
Taxpayers considering the adoption of an ESOP or a structure change of a corporate ESOP sponsor should consult closely with their tax advisors to ensure no details regarding corporate structure are overlooked that may jeopardize the overall plan status as an ESOP that receives specific benefits.