Congress Giveth and Congress Taketh Away: The Slow Death of the SESOP
Akron Tax Journal, Vol. 20, p. 59, 2005
33 Pages Posted: 15 Feb 2010 Last revised: 17 Feb 2010
Date Written: August 1, 2005
In 1996, Congress passed the Small Business Job Protection Act ("SBJPA") that, in part, allowed an Employee Stock Ownership Plan ("ESOP") to own a Subchapter S corporation . In an effort to get around the broad based ownership rules present in EGTRRA, SESOPs were formed using options to purchase shares of the SESOP instead of direct ownership of the shares of stock." The Service took the position that because the ESOPs were not set up to "provide substantial benefits, or substantial participation in the ownership of the S Corporations," the entities would not be treated as having been formed prior to the effective date. In an effort to make an end run around the broad based ownership rules present in EGTRRA, SESOPs were formed using options to purchase shares of the SESOP instead of direct ownership of the shares of stock. Each of the qualified subsidiaries granted its owner, an officer and investment manager for their qualified entity, a nonqualified stock option to acquire most if not all of the shares of the qualified subsidiary. Further, if the manager's option to purchase his shares of the qualified subsidiary was considered synthetic equity, he would own less than ten percent (10%) of the stock of the 200 employee S Corp.
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