Tax Facts Q: 3647. What special qualification requirements apply to employee stock ownership plans ("ESOPs")?
Churchill Ltd. Employee Stock Ownership Plan & Trust v. Commissioner, TC Memo 2012-300
In this case, the Tax Court upheld the IRS' decision to retroactively revoke an employee stock ownership plan ("ESOP") maintained by a company because it failed to properly update the plan to reflect legislative changes that affected plan qualifications requirements.
The employer in this case made an attempt to comply with new legislative developments, but the IRS and the Tax Court here agreed that these efforts were inadequate.
First, the employer failed to make plan amendments retroactive so that they covered all tax years in which the revised qualification requirements applied. Further, even though the employer intended the amendments to comply with new qualification requirements, the modifications made were insufficient to notify employees of their rights and obligations under the plan.
These failures were sufficient for the IRS to determine that the employer did not exercise reasonable diligence in maintaining the ESOP. Therefore, the ESOP's qualification under IRC Section 401(a) was revoked for all tax years in which the plan did not properly reflect the IRC qualification requirements.