The Tax Court, Restricted Stock, and ESOPs

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Cory D. Halliburton

Cory D. Halliburton



Cory Halliburton serves as general counsel and business adviser to a nationwide nonprofit / tax-exempt client base, as well as for multi-state professional service companies. He is a results-oriented attorney, with executive-level strategy and an understanding of the intersection of law and business judgment. With a practical upbringing, he pushes for process-driven results in internal governance, strategy and compliance with employment law, and complex or unique contracts and business relationships.

He dedicated the first ten years of his practice to mainly commercial litigation matters in West Texas and the Dallas-Fort Worth Metroplex. During that experience, Mr. Halliburton transitioned his practice to a more general counsel role, with an emphasis on nonprofit and tax-exempt organizations, advising those organizations through formation, dissolution, litigation, governance, leadership succession, employment law, contracts, intellectual property, tax exemption issues, policy creation, mergers and other. He has served as borrower’s counsel for tax-exempt bond and loan transactions near $100 million aggregate; some with complex pre-issue construction, debt payoff and other debt financing challenges.

Mr. Halliburton also serves as outside legal and business advisor for executive professionals in multi-state engineering firms, with a focus on drafting and counsel on significant service agreements, employment law matters, and protection of trade secrets.

The Tax Court, Restricted Stock, and ESOPs

The Tax Court’s recent decision in Larson v. Commissioner involved a frequent tax issue in the context of S corporations and control persons: Whether restricted stock of an S-corporation contributed to an employee stock ownership plan (ESOP) for the benefit of a control person was subject to substantial risk of forfeiture?  What follows is a short synopsis of the case and the key points of law:

Short Summary: Restricted stock of an S corporation that was placed into an employee stock ownership plan for the benefit of a control person of the S corporation was includable in the control person’s taxable income. The restrictions associated with the stock were not likely to be enforced such that there was no “substantial risk of forfeiture” to the beneficial owner, i.e., the control person. And, the control person, also a trustee of the ESOP, failed to perform fiduciary duties associated with the ESOP, further indicating the lack of any risk of forfeiture to the stock in question. Thus, the income of the S corporation should have passed through, pro rata, to the control person in the tax years in question.

Key Issues:

Short Answers: No, and no.

Primary Holdings:

Key Points of Law: