S Corporation ESOP Loan

[Scott]

In PLR 199938052, the IRS ruled that an S corporation ESOP cannot use S corporation distributions paid on allocated shares of stock to repay an ESOP loan. Would the following work as an alternative to service an ESOP loan guaranteed by the company?

The ESOP would use S corporation distributions on the allocated shares to purchase additional shares from the company. The company would use the proceeds from the sale of stock to service the portion of the debt that would have otherwise been paid with the S corporation distributions.

Any thoughts?

[QDROphile]

Would it bother you if the company's payments on the loan were treated as additional contributions to the ESOP? If not, then have the company make additional contributions to the ESOP instead of making the loan payments. The ESOP can pay the loan with the additional contributions. If the idea of deemed additional contributions bothers you ....

[IRC401]

Wouldn't the debt cancellation be treated as a contribution followed by a loan payment, which would trigger the release of more shares from the suspense account?