Tax Court - Benefits in retroactively disqualified ESOP subject to tax in year of termination 

October 4:   The U.S. Tax Court today issued an opinion holding that an individual taxpayer must include in income for 2004 the entire amount of his vested accrued benefits in an employee stock ownership plan (ESOP) which the IRS had retroactively disqualified from ESOP status for 2000-2004. Yarish v. Commissioner, 139 T.C. No. 11 (October 4, 2012)

Text of the opinion: Yarish [PDF 23 KB]

Summary

The taxpayer (a plastic surgeon) formed an S corporation to manage his medical practice entities, and participated in an ESOP. He was defined as a highly compensated employee and was fully vested in the ESOP until its termination.


Multiple contributions were made to the ESOP during 2000 to 2004, and the balance in the ESOP at the end of 2004 was over $2.4 million. None of that amount had been taxed to the taxpayer before the 2004 plan year.


The ESOP was terminated on the last day of 2004, and the taxpayer’s entire account balance was transferred to an individual retirement account on that same day.


The IRS retroactively disqualified the ESOP through a revocation letter for the 2000-2004 period because the ESOP was found not to have satisfied the requirements under section 401(a) for failing to satisfy section 410(b) and that the trust under the ESOP was not exempt from tax under section 501(a).


The Tax Court today held that the taxpayer must include in income for 2004 the entire amount of his vested accrued benefit in the ESOP.



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©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

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