Announcement 2005-80 states that Management S Corporation ESOP transactions are eligible for settlement under the initiative. What abuse was involved in those transactions?
A.1. The Service has identified certain transactions involving S corporation management companies owned by employee stock ownership plans (ESOPs) as abusive transactions. A taxpayer who has an arrangement similar to the one described in this Q&A is eligible to participate in this settlement initiative if the taxpayer otherwise meets the requirements of Announcement 2005-80. In these transactions, taxpayers have attempted to exclude the income of an operating business through the use of a combination of an S corporation and an arrangement purported to be an ESOP, both of which are claimed to have been established before March 14, 2001. The owner of an operating business creates (or claims to create) an S corporation (Management S Corporation) and causes the two entities to enter into an agreement under which the operating business is to pay a fee to the S corporation in exchange for management or other services. In addition, the Management S Corporation establishes (or claims to establi
