Excise Tax Does Not Apply in ESOP Liquidation

In PLR 200135044, the IRS concluded that a company that was terminating its ESOP on acquisition by another company through an asset acquisition could distribute cash to the ESOP participants without incurring an excise tax under Code Section 4978. Section 4978 requires a 10% excise tax on Section 1042 tax-deferred sales to an ESOP if the ESOP does not retain at least 30% ownership in the company for at least three years. One of the exceptions to this rule is for separation from service resulting in a one-year break in service. The acquisition was structured so that distributions would be made as soon as possible after that break in service occurred. However, some of the employees of the acquired company then went to work for the acquirer, which might not be considered a break in service under the "same desk" rule (where an employee does the same job for the acquirer). In this case, however, the IRS ruled that the employees hired by the acquirer were not providing services to the acquired corporation in a continuation of the acquired corporation's business. Thus, the excise tax would not apply.