Instructions For Form 5330 - Internal Revenue Service (Page 5 of 13) in pdf

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rules are effective for plan years ending

A brother or sister of the individual or

based on reasonably anticipated

after March 14, 2001, if:

of the individual’s spouse and any lineal

experience and reasonable actuarial

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descendant of the brother or sister.

assumptions, to enable the plan to

The ESOP was established after

cease to be in critical status by the end

March 14, 2001, or

A spouse of an individual who is

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of the rehabilitation period.

The ESOP was established on or

legally separated from an individual

before March 14, 2001, and the

under a decree of divorce or separate

All, or part, of this excise tax may be

employer maintaining the plan was not

maintenance is not treated as the

waived under Section 4971(g)(5).

an S corporation.

individual’s spouse.

Line 16. Section 4965 — Prohibited

An individual is a disqualified person

Tax Shelter Transactions. For tax

The rules below apply to the

if:

years ending after May 17, 2006, if an

prohibited allocation, identified in items

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The total number of shares owned by

entity manager of a tax-exempt entity

3 and 4, under line 6. The excise tax on

the person and the members of the

approves or otherwise causes the entity

these transactions under section 4979A

person’s family (as defined in section

to be a party to a prohibited tax shelter

is 50% of the amount involved. The

409(p)(4)(D)) is at least 20% of the

transaction during the year and knows

amount involved includes:

deemed-owned shares (as defined in

or has reason to know that the

1. The value of any synthetic equity

section 409(p)(4)(C)) in the S

transaction is a prohibited tax shelter

owned by a disqualified person in any

corporation, or

transaction, then the entity manager

nonallocation year. Synthetic equity

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The person owns at least 10% of the

must pay the excise tax under section

means any stock option, warrant,

deemed-owned shares (as defined in

4965(b)(2).

restricted stock, deferred issuance

section 409(p)(4)(C)) in the S

For purposes of section 4965, plan

stock right, or similar interest or right

corporation.

entities are:

that gives the holder the right to acquire

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Qualified pension, profit-sharing, and

or receive stock of the S corporation in

Under section 409(p)(7), the

stock bonus plans described in section

the future. Synthetic equity may also

Secretary of the Treasury may,

401(a);

include a stock appreciation right,

through regulations or other

CAUTION

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Annuity plans described in section

phantom stock unit, or similar right to a

guidance of general applicability,

403(a);

future cash payment based on the

provide that a nonallocation year occurs

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Annuity contracts described in

value of the stock or appreciation; and

in any case in which the principal

section 403(b);

nonqualified deferred compensation as

purpose of the ownership structure of

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Qualified tuition programs described

described in Regulations section

an S corporation constitutes an

in section 529;

1.409(p)-1(f)(2)(iv). The value of a

avoidance or evasion of section 409(p).

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Retirement plans described in

synthetic equity is the value of the

For a description of situations where

section 457(b) maintained by a

shares on which the synthetic equity is

the definition of nonallocation year was

governmental employer;

based or the present value of the

considered, see Rev. Rul. 2004-4,

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Individual retirement accounts within

nonqualified deferred compensation.

2004-6 I.R.B. 414.

the meaning of section 408(a);

2. The value of any S corporation

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For section 4979A excise taxes,

Individual retirement annuities within

shares in an ESOP accruing during a

the amount entered on Part I,

the meaning of section 408(b);

nonallocation year or allocated directly

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line 6 is 50% of the amount

Archer medical savings accounts

or indirectly under the ESOP or any

involved in the prohibited allocations

(MSAs) within the meaning of section

other plan of the employer qualified

described in items 1 through 4, under

220(d);

under section 401(a) for the benefit of a

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Line 6. Section 4979A – Tax on Certain

Coverdell education savings

disqualified person. For additional

Prohibited Allocations of Qualified

accounts described in section 530; and

information see Regulations section

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ESOP Securities, earlier.

Health savings accounts within the

1.409(p)-1(b)(2).

Line 10a. Section 4971(g)(2) — Failure

meaning of section 223(d).

3. The total value of all the

to Comply With a Funding

deemed-owned shares of all

An entity manager is the person who

Improvement or Rehabilitation Plan.

disqualified persons.

approves or otherwise causes the entity

Failure to comply with a funding

to be a party to a prohibited tax shelter

improvement or rehabilitation plan will

transaction.

A nonallocation year means a plan

result in an excise tax equal to each

year where the ESOP, at any time

The excise tax under section

failure of each employer to make the

during the year, holds employer

4965(a)(2) is $20,000 for each approval

required contribution within the time

securities in an S corporation, and

or other act causing the organization to

frame under such plan. The tax is paid

disqualified persons own at least:

be a party to a prohibited tax shelter

by each employer responsible for

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50% of the number of outstanding

transaction.

contributing to or under the plan.

shares of the S corporation (including

Include on line 10a the amount of each

A prohibited tax shelter transaction

deemed-owned ESOP shares), or

contribution the employer failed to

is:

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50% of the aggregate number of

make in a timely manner.

1. A Listed transaction within the

outstanding shares of stock (including

A funding improvement plan is a

meaning of section 6707A(c)(2). Listed

deemed-owned ESOP shares) and

plan which consists of the actions,

transactions are reportable transactions

synthetic equity in the S corporation.

including options or a range of options

that are the same as, or substantially

to be proposed to the bargaining

similar to, any transactions that have

For purposes of determining a

parties, formulated to provide, based on

been specifically identified by the

nonallocation year, the attribution rules

reasonably anticipated experience and

Secretary as a tax avoidance

of section 318(a) will apply; however,

reasonable actuarial assumptions, for

transaction for purposes of section

the option rule of section 318(a)(4) will

the attainment by the plan during the

6011.

not apply. Additionally, the attribution

funding improvement period.

2. A prohibited reportable

rules defining family member is

transaction is:

modified to include the individual’s:

A rehabilitation plan is a plan which

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Spouse.

consists of actions, including options or

a. Any confidential transaction

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Ancestor or lineal descendant of the

a range of options to be proposed to

within the meaning of Regulations

individual or the individual’s spouse.

the bargaining parties, formulated,

section 1.6011-4(b)(3); or

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Instructions For Form 5330 - Internal Revenue Service Page 5

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