Compliance June 10, 2011

Tax Court Catches Phony ESOP

Mark Warmoth created two corporations since 1988, which manufactured nothing except tax-saving retirement plans for their founder, according to the U.S. Tax Court. 
Reported by

In 1988, Warmoth founded his first company, Weekend Warrior Trailers, and incorporated it in 1995.  In 2002, Warmoth incorporated his second company, Leading Edge and received all 10,000 of Leading Edge’s shares of stock. He was its only board member, Chief Executive Officer, and President.

According to the Tax Court memorandum, Warmoth established a deferred compensation plan (NQDC), an employee-stock ownership plan (ESOP), and a 401(k) plan – even though it was discovered that the companies did not have any legitimate business purpose.

The IRS argued that Leading Edge should not be considered for federal income tax purposes because it lacked any substance and was formed solely for the purpose of obtaining tax benefits. Warmoth argued that there were “potential” legitimate reasons for incorporating Leading Edge, but the court did not agree.

The case is Weekend Warrior Trailers, Inc., et al, Petitioners v. Commissioner of Internal Revenue. The memorandum is available here. 

«