S Corporation and Employees Were Related Persons for Purposes of Matching Deductions and Income of ESOP (Petersen, TC)

CCH Tax Day Report

In a case of first impression, the Tax Court concluded that an accrual-basis S corporation and the cash-basis participants in its employee stock ownership plan (ESOP) were related persons for purposes of the Code Sec. 267(a)(2) “matching rule” that deferred the corporation’s deductions for accrued payroll expenses until the wages were includible in the beneficiaries’ incomes. The ESOP’s stock was attributed to its participants/beneficiaries because the ESOP was a “trust” under the express terms of the plan agreement and the trust instrument that created the ESOP, as well as under the relevant statutes and the usual construction of the word. In fact, the ESOP had to be a trust in order to legally hold the company’s stock. In addition, the Code Sec. 318 exclusion of tax-exempt trusts from the stock attribution rules did not apply to the related person rules; the S corporation was not required to be an accrual taxpayer; and generally accepted accounting principles (GAAP) were irrelevant.

The taxpayers were not liable for the accuracy-related penalty because the issue was one of first impression.

S.M. Petersen, 148 TC —, No. 22, Dec. 60,932

Other References:

Code Sec. 267

CCH Reference – 2017FED ¶14,161.83

Code Sec. 6662

CCH Reference – 2017FED ¶39,661.65

Tax Research Consultant

CCH Reference – TRC ACCTNG: 12,150

CCH Reference – TRC PENALTY: 3,116



All stories by: CCHTaxGroup

Leave a Reply

Your email address will not be published.