ESOPs and ESOP transactions are highly complex. They involve several areas of the Internal Revenue Code including corporate taxation, qualified plan, design and administration, and mechanical tests. It is important to understand how ESOP transactions can potentially trigger excise taxes under the Code.
From a corporate tax perspective, the transaction and the deduction limits for ESOP transactions have to be adhered to. From a plan administration standpoint, allocations have to be correct, and if they are not correct, they may result in having to submit the plan to the voluntary compliance correction procedures that are available for qualified plans. In the event of failing to comply with certain tests, such as anti-abuse rules of the Code, excise taxes and deemed distributions can occur.
All of these aspects of the Internal Revenue Code require the corporate tax advisor, the personal income tax advisor, the plan administrator, and the appraiser to work together to ensure that the plan and the transactions are properly constructed and administered.