Information For...

For you and your family
Standard mileage and other information

Forms and Instructions

Individual Tax Return
Instructions for Form 1040
Request for Taxpayer Identification Number (TIN) and Certification
Request for Transcript of Tax Return


Employee's Withholding Allowance Certificate
Employer's Quarterly Federal Tax Return
Employers engaged in a trade or business who pay compensation
Installment Agreement Request

Popular For Tax Pros

Amend/Fix Return
Apply for Power of Attorney
Apply for an ITIN
Rules Governing Practice before IRS

EP Abusive Tax Transactions - S Corporation ESOP Abuse of Delayed Effective Date for Section 409(p)

Revenue Ruling 2003-6 discusses prohibited allocations of securities in an S Corporation. IRC section 409(p) requires that an employee stock ownership plan (ESOP) holding employer securities consisting of stock in an S corporation provide that no portion of the assets of the plan attributable to such employer securities may, during a nonallocation year, accrue for the benefit of any disqualified person. IRC section 409(p) is intended to limit the establishment of ESOPs by S corporations to those that provide broad-based employee coverage and that benefit rank-and-file employees, as well as highly compensated employees and historical owners.  

In general, these provisions apply to S corporation ESOPs established after March 14, 2001. S corporation ESOPs established prior to March 14, 2001 must have complied with the law by December 31, 2004. Promoters marketed arrangements involving ESOPs that hold employer securities in an S corporation for the purpose of claiming eligibility for the delayed effective date of IRC section 409(p).

This ruling describes an S corporation ESOP not eligible for the delayed effective date under IRC section 409(p) and thus is subject to the nonallocation rules of IRC section 409(p). Any taxpayer who is a disqualified person with respect to the S corporation ESOP is treated as receiving a deemed distribution of stock allocated to the taxpayer’s account and income with respect to that account. In addition, excise taxes under IRC section 4979A apply to any nonallocation year.

Other resources

S Corporation ESOP Guidance
Guidance and other useful information to assist in understanding issues that may exist with S Corporation ESOPs.