IRS Attacks Another ESOP S Scam

In a briefing to the Profit Sharing Council of America, the IRS said that it is developing guidance to prohibit ESOP S corporation structures in which a management corporation is formed to siphon off most of the ESOP's benefits. Specifically, the IRS said it will address situations in which:

• Management establishes S corporation to provide management services
• S corporation establishes ESOP and ESOP holds all S corporation shares; management sole beneficiaries
• S corporation profits flow through to ESOP and escape tax
• Management takes modest salaries from S corporation, balance in deferred compensation
• Planning guidance to shut down practice
• Plan to list as tax shelter requiring disclosures