Page 214 - TaxAdviser_2022

TAX TRENDS

Morley stock was vested when he a removal or waiver of the forfeiture re- that Larson held was not subject to a
received it because the forfeiture condi- strictions required the consent of 100% substantial risk of forfeiture.
tions in the restricted stock agreement of Morley’s shareholders. Because the
were unlikely to be enforced. Alter- Morley ESOP owned 5% of the Morley Reflections
natively, it argued that the restrictions shares, its consent was required to lift Larson and Pfaff also were charged
lacked economic substance because there the forfeiture restrictions. However, criminally for their BLIPS activities and,
was no nontax business purpose for the Larson did not make Morley obtain in December 2008, they were convicted
restricted stock agreements or the em- the ESOP’s consent. In the court’s of 12 counts of tax evasion. In April
ployment agreements that Larson, Pfaff, view, this also showed that Larson, 2009, Larson was given a mandatory
and Makov entered into. Pfaff, and Makov had complete control sentence of 10 years and one month in
over Morley. prison, three years of supervised release,
The Tax Court’s decision The Tax Court additionally found and a fine.
The Tax Court held that Larson’s that another indicator that the three Larson, T.C. Memo. 2022-03
Morley stock was not subject to a men had complete control of Mor-
substantial risk of forfeiture because, ley was that the record in the case
based on the facts and circumstances, did not show a pattern of open and Procedure & Administration
the forfeiture conditions were unlikely fair dealing with the Morley ESOP
to be enforced. participants. According to the court, Accountant’s errors are not
In situations where restricted prop- the Morley ESOP participants were reasonable cause for late
erty is transferred to an employee “who woefully ill-informed of their rights filing
owns a significant amount of the total and seemed oblivious to the existence An accountant’s failure to timely e-file
combined voting power or value of all of stock forfeiture restrictions, and an income tax return extension for
classes of stock of the employer corpora- thus it was unsurprising that they were the taxpayers and their reliance on his
tion,” Regs. Sec. 1.83-3(c)(3) provides unaware that Larson had released the erroneous advice about the accrual of
several factors that should be considered restrictions or that they had the right late-filing penalties were not reason-
in determining whether stock restric- to vote on such a release. The Morley able cause for the late filing of their
tions will be enforced. According to the ESOP participants would have had a tax return for purposes of the late-
Tax Court, the regulation emphasizes strong economic incentive to enforce filing penalty.
that both the stock ownership percent- the forfeiture clauses, but Larson did
ages of the shareholders and their de not give them the opportunity to have Background
facto power to control the corporation them enforced. Erik and Aspasia Oosterwijk built a
are important in the analysis. The court further found that Lar- highly successful meat wholesale busi-
While Larson, Pfaff, and Makov did son’s handling of his fiduciary duties to ness in Baltimore over 24 years, and, in
not individually own enough stock to the plan were a “grotesque conflict of 2017, they sold the business.
control the corporation, the court found interest” in his dealing with the ESOP. For the 2017 tax year, the Ooster-
ample evidence that the three men did Actions that the court cited as giving wijks and their accountant, Ernie Pasz-
have control over Morley. The three rise to a conflict of interest included kiewicz, decided to file for an extension
men had formed Morley and promoted Larson’s failing to resign as a Morley on Form 4868, Application for Automatic
its BLIPS business together. Further, ESOP trustee before voting on the stock Extension of Time to File U.S. Individual
Larson had testified that they intended forfeiture restrictions and his failing Income Tax Return. Paszkiewicz told the
to act “as one, unanimously” when to retain outside counsel to protect the couple he would e-file the extension
lifting the restrictions, and, when the ESOP’s interest in the vote to lift the request before the individual return due
restrictions ceased to be beneficial, they stock forfeiture restrictions. date and have $1.8 million debited from
terminated the restrictions. The court Taken together, the court concluded their bank account to pay the balance of
concluded that Larson’s relationship to that evidence of Larson, Pfaff, and Ma- the tax due for 2017.
the officers and directors of the corpora- kov’s control over Morley, and Larson’s However, the $1.8 million payment
tion and their actions revealed an effort clear conflict of interest in his dealings was not debited from their bank account
to collectively avoid enforcement of with the Morley ESOP proved that by the due date. The Oosterwijks, seeing
the restrictions. the stock forfeiture provisions in the that the money was still in their bank
Moreover, the court observed that the restricted stock agreement would not be account, watched to see if it was trans-
restricted stock agreement required that enforced. Therefore, the Morley stock ferred in the following days. On April

44 April 2022 The Tax Adviser