Issue Snapshot–Preventing an S ESOP Nonallocation Year

Document Excerpt

ongress enacted IRC Section 409(p) in 2001 (P.L. 107-16 Sec. 656) to prevent S corporation employee stock ownership plans (ESOPs) from continuing to be used as abusive tax shelters. The rules under IRC Section 409(p) are designed to prevent a group of “disqualified persons” (DPs) from collectively owning 50% or more of an S corporation’s stock (i.e., the definition of a “nonallocation year”). Since there are no prescribed correction methods to address Section 409(p) violations, prevention methods are important considerations for both ESOP plan design and operation. A Chief Counsel Advice (CCA) issued on September 14, 2017, analyzed various plan provisions designed to prevent Section 409(p) violations. This Issue Snapshot explores methods for preventing a Section 409(p) violation including those that were the subject of the CCA.


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