SECTION 1. PURPOSE

The Treasury Department and the Internal Revenue Service have determined that it is consistent with the purposes of, and policies underlying, employee stock ownership plans (ESOPs) to enable an ESOP to direct certain rollovers of distributions of S corporation stock to an individual retirement plan (IRA) in accordance with a

distributee’s election without terminating the corporation’s S election. Accordingly, if the requirements of this revenue procedure are satisfied, the Service will accept the position that a corporation’s S election is not affected when an ESOP distributes stock of that corporation to a participant’s IRA in a direct rollover.

Rev. Proc. 2003–23, 2003–1 C.B. 599, provides that the Service will accept the position that an S corporation’s election is not affected as a result of an ESOP’s distribution of S corporation stock in a direct rollover to an IRA if the terms of the ESOP require that the S corporation repurchase its stock immediately upon the ESOP’s distribution of the stock to the IRA, the S corporation actually repurchases the stock, and the other requirements of that revenue procedure are satisfied. This revenue procedure modifies Rev. Proc. 2003–23 by providing that the Service also will accept the position that an S corporation’s election is not affected as a result of an ESOP’s distribution of S corporation stock in a direct rollover to an IRA if the terms of the ESOP require that the S corporation repurchase its stock immediately upon the ESOP’s distribution of the stock to the IRA, the ESOP is permitted to assume the rights and obligations of the S corporation to repurchase the S corporation stock immediately upon the ESOP’s distribution of the stock to an IRA, the ESOP repurchases the stock, and the other terms of this revenue procedure are satisfied.