In this case, the S corporation owned 100% of the S corporation stock, and the plan had, at most three participants.
Read the Tax Court’s opinion [PDF 122 KB]
The taxpayer on or about April 26, 2006, filed Form 1120S, U.S. Income Tax Return for an S Corporation, for 2005, showing that that during 2005 an ESOP owned 100% of the taxpayer stock.
The ESOP in 2006 filed its employee benefit plan annual return on Form 5500, Annual Return/Report of Employee Benefit Plan, for 2005. On the Form 5500, the ESOP attached schedules to its return showing that it had three participants during 2005—two of whom were not identified and were described as “Active participants” and one of whom was identified and described as “Other retired or separated participants entitled to future benefits.” The ESOP’s assets consisted exclusively of “employer securities.”
Subsequently, the ESOP filed an amended return for 2005 and, on an attached schedule, it did not identify the individual described as “Other retired or separated participants entitled to benefits.”
The ESOP did not file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, for 2005.
The IRS in April 2011 issued a notice of deficiency to the ESOP, asserting a liability for a section 4979A excise tax because an individual was a disqualified person of the ESOP under section 409(p)(4) and as a result, there was a nonallocation year.
The parties agreed on the definition of the term “nonallocation year” as referring to the first nonallocation year with respect to an employee stock ownership plan, but disputed whether there had been a “nonallocation year” that imposition of the excise tax under section 4979A(a).
Tax Court’s opinion
The Tax Court held that there is a nonallocation year if disqualified persons own
at least 50% of the number of shares of stock in the S corporation with respect to an ESOP and that this “nonallocation year” in triggers imposition of the excise tax under section 4979A(a) on any such “ownership” by disqualified persons.
However, the Tax Court continued by noting that the IRS notice of deficiency for the excise tax was not timely provided (i.e., not provided before a date that is three years from the later of the ownership that gives rise to the excise tax under section 4979A(a) or the date on which IRS was “notified” of such ownership).
The Tax Court held that under the facts, the Forms 5500 and 1120S provided enough information for the IRS to discern that section 409(p) requirements had to fail because there were only three participants. Thus, the statute of limitations started to run when the Form 5500 was filed in 2006—and the statute of limitations was closed in 2009. When the IRS sent the notice of deficiency in 2011, it was too late.