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
Code Sec. 267
CCH Reference – 2017FED ¶14,161.83
Code Sec. 6662
CCH Reference – 2017FED ¶39,661.65
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CCH Reference – TRC ACCTNG: 12,150
CCH Reference – TRC PENALTY: 3,116