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to an employee stock ownership plan (ESOP) that benefited the
employees of a corporation formed by the taxpayers to conduct
their farming operation. In return for the taxpayers' interest
in the land, the ESOP agreed to pay the taxpayers a private
annuity of $478,615 per year.
Respondent determined that the sale of the farmland to the
ESOP was a prohibited transaction under section 4975(c)(1)(A)
and that the taxpayers were liable for excise tax deficiencies
under section 4975(a) and (b). We agreed. Zabolotny v.
Commissioner, 97 T.C. at 399. We held in relevant part that:
(1) The sale was a prohibited transaction, and (2) this
transaction was not "corrected", even if the transaction had
been favorable to the ESOP from the start. Id. We reasoned
that a "correction" occurs when the transaction is rescinded
through an affirmative act. Id.
Upon appeal, the Court of Appeals for the Eighth Circuit
agreed with us only as to the first issue; to wit, that the
transaction was a prohibited transaction. Zabolotny v.
Commissioner, 7 F.3d at 777. As to the second issue, the Court
of Appeals held that a correction may occur absent an
affirmative act of rescission. Id. at 777-778. The court
found that the transaction in Zabolotny corrected itself at the
end of 1981 because, at that time, the ESOP was in exceptional
financial condition and no plan beneficiary risked losing plan
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