California Company’s ESOP Deemed an Abusive Tax Avoidance Scheme

A construction business owner is on the hook for at least $1 million in personal income taxes and penalties after a California tribunal held in a decision released Monday that he created an employee stock ownership plan with no economic substance solely to avoid paying taxes.

Alan Varela’s scheme involving his S corporation, Mud Management Inc., was an abusive tax avoidance transaction meant to indefinitely defer taxes on millions in income, the California Office of Tax Appeals held. The panel therefore sustained a reallocation by the state Franchise Tax Board of over $5 million in income from the ESOP back ...