Michael Morrissey - Page 18

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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            that a "correction" occurs when the transaction is rescinded              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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