Can S corp's use dividneds on allocated shares to pay off an exempt lo

[Guest kredlin]

What is the basis for distinguishing between S corp.'s and C corp's when deciding whether dividends on allocated shares can be used to pay off an exempt loan? The IRS has allowed C corp's to do this, but not S corp's. Why?

[RLL]

kredlin ---

The only specific provision in the Internal Revenue Code relating to the use of dividends (on employer stock) for payments on an ESOP loan is Section 404(k)(2)(A)(iii), relating to the dividend deduction. Section 404(k)(1) specifically limits the dividend deduction to C corporations, and the IRS has interpretated its 1977 ESOP loan regulations, Sec. 54.4975-7(B), to provide that only dividends on unallocated (loan suspense account) shares may be used for loan payments in the case of an S corporation ESOP.

There are many ESOP lawyers who believe that the IRS is misinterpreting its ESOP regulations.