Corey Rosen
Employee in Sham S ESOP Must Pay Taxes
In Larson v. Commissioner, T.C. Memo 2022-3, No. 15809-11, (U.S. Tax Court, Feb. 2, 2022), the tax court rejected an appeal by the plaintiff over an assessment of several million dollars in taxation for his nominally restricted stock. The deal terms were a variation of sham ESOP transactions that were attempted in the early 2000s and were shut down by the IRS. The deal included assigning all profits to a minority S ESOP and granting large amounts of nominally restricted stock to Larson and his partners. Larson contended his stock grants were not taxable because of the restrictions, which included performance terms, but the court concluded that because of the control he and his colleagues exercised, the restrictions were not likely to be enforced and that, in any event, the ESOP trustees were not properly informed of the grants or their terms. To top it off, the firm’s business was to sell tax shelters that the IRS named as listed transactions. As a very good article explaining this elaborate tax dodge put it, “You cannot make this stuff up.”
